If you think the payday lending industry charges its customers high interest rates and exorbitant fees then consider overdrafts from financial institutions. Over in Great Britain, using a bank overdraft can be just as expensive as borrowing a payday loan, according to a new report from consumer group?
The consumer organization provided an example from its analysis: borrowing $100 from an overdraft on your checking account for 31 days will cost between $20 and $30, while taking out payday loans online for the same length of time will come with an average price-tag of $20 to $37. For unauthorized overdrafts it could cost $100 to borrow the same amount of money.
With this kind of information, the group is now urging the Financial Conduct Authority (FCA) to prohibit excessive charges in the consumer credit industry as well as a cap on default charges, reports the London Telegraph.
“The Government and regulators have rightly focused on the scandal of payday lending, but they must not lose sight of the urgent need to clean up the whole of the credit market. High street bank overdraft fees can be just as eye-watering as payday loans,” said Richard Lloyd, executive director of Which?
“It’s time to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they’re using.”
The finance industry has shot back. Anthony Browne of the British Bankers Association argues that overdraft charges have been significantly reduced in recent years and clients have actually saved about £1 billion in fees.
Instead, Browne says, consumers should take advantage of new regulatory rules that allow individuals to better select an account that suits their needs rather than choosing one that has features they won’t even use.
“The higher figures quoted by Which? are based on extreme examples of unauthorized overdrafts. This is not a form of borrowing that we would ever recommend,” Browne explained to Yahoo! Finance UK.
“We always encourage customers to shop around to get the best deals and the recently launched switching service makes it easier than ever before. Banks compete vigorously for business and customers should take full advantage of this competition to get the bank account that’s best for them.”
In order to better protect consumers in the credit industry, the FCA has introduced a series of measures, including limiting the number of times a payday lender rolls over a loan and applying “risk warnings” on customer applications.
The Competition Commission is currently investigating the payday loan industry. The sector is currently valued at £2 billion ($3.3 billion).