Trade Body Tells Customers ‘To Be Careful’ of Claims Companies

PayDay Loans

The highly controversial payday loans industry is under further criticism, but this time it is not towards the lenders, but the claims companies.

With the window to claim for PPI coming to a close in August this year, many claims providers are turning their attention to the potentially lucrative mis-sold payday loans industry.

Customer claims

Recent developments in the high-cost loans industry mean that ex-customers can claim anywhere from £100 to £1,000 if they have been granted a loan which they were unable to repay.

This could have been due to relaxed credit and affordability checking by the lender or the individual being unemployed, on benefits or with a very poor credit record.

Prior to the FCA’s introduction of new regulation in January 2015, many victims of high cost loans suffered huge debt as a result, with lenders charging high default fees, offering rollovers and extensions which could very easily triple or quadruple the cost of the original loan taken out.

The ability to claim on mis-sold loans has seen Wonga.com, the once market leader, lose over £220 million and fall into administration in late 2018. Other competitors including The Money Shop and Wageday Advance have followed suit.

The costs incurred not only come from the money refunded to the customer but also the administration cost of £500 to be paid to the Financial Ombudsman Service, even if the claim is void. Making the overall process very costly indeed.

The issue with claims companies 

The Consumer Finance Association (CFA), which acts as the trade body for the payday loans industry, has expressed their concern with claims companies. Accordingly, claims management companies will currently charge a commission of around 20% to 33% of the overall refund, however, the victim can also issue a claim without external help and retain the full amount.

In addition, the drive of claims companies to profit from compensation claims means that nine out of 10 claims lodged are poorly constructed and not viable. This significantly slows down the process for lenders to issue legitimate claims, thereby increasing the backlog and creating huge unnecessary costs for lenders.

Shift away from payday

Since the FCA took over from the Office of Trading as the City Regulator in 2014, there has been noticeable changes and improvements in the payday loan industry.

The introduction of a daily price cap of 0.8%, default fee cap at £15 and strict authorisation required for lenders and brokers, has seen the industry and number of loans shrink significantly.

However, the demand for loans is still prevalent and many are turning their attention to other products including instalment products, guarantor products and debt consolidation. The latter allows customers to compile all their outstanding debts into one single loan and customers will commonly secure the loan against their property.

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