US payday loan firms plan rapid expansion in cash-strapped Britain | Personal loans

US corporations offering loans to poorer customers that often charge more than 30% in interest a month are planning a massive expansion in the UK, prompting warnings that thousands of families could become trapped in a cycle of debt, a problem already seen in America.

One large “payday loan” group told investors it aims to almost quadruple its UK presence – opening some 800 stores and expanding into deprived rural communities – to target families affected by redundancy or loss of income.

Payday lending, in which relatively small sums are offered for the short-term at a cost regularly exceeding 30% a month, is hugely controversial in the US. A number of states have passed laws capping maximum interest rates or limiting the number of loans per customer.

The UK industry is growing fast – one web lender, Wonga.com, began sponsoring a Premier League football team, Blackpool, less than three years after starting business – but remains relatively small.

A US loans giant, Dollar Financial, which already operates 370 Money Shops in the UK, has just bought PayDay UK, the biggest British internet payday operator. Last month its chief executive, Jeffrey Weiss, told investors that recession-hit Britain – where the sector is relatively unregulated compared with the US – was a prime market. He said: “I think we’re maybe 25% of the way towards a full country build-out in the UK. That includes having large stores in highly dense areas and – an area we really haven’t moved to yet – smaller stores in more rural areas.

“If you extrapolate from our current 350 stores I think there is a potential universe for us of 1,200 locations.”

The news has alarmed debt advice groups in the UK and US. While acknowledging payday loan firms fill a gap vacated by banks, which in recent years have largely denied overdrafts to customers with mixed credit ratings, they argue that the way the industry operates is flawed.

Payday loans are marketed as a source of instant funds to meet a one-off financial emergency. Via a shop or a website, customers can borrow around £75 to £750, which is deposited in their bank account in as little as 15 minutes, to be repaid in around two to four weeks.

While the interest is extremely high, this is seen as manageable if the debt is paid off as scheduled. However, debt advice groups warn that many borrowers repeatedly “roll over” the loan, which grows exponentially as interest and extra administration fees mount up.

Someone who has suffered is Paul Stephens, 23, from Cornwall, who is married with a 14-month old child and another on the way. He said: “We started off with one loan for £75 over 28 days. We both work in the care industry so don’t earn much money and that month we had a couple of extra bills. The loan was for basics – a big food shop.

“We found ourselves rolling the loan over again and again, still being short of money every month, and then taking out other loans to cope. We owe maybe £3,000. Of that, £1,200 is a £600 loan which has doubled in 47 days of being late.

“It’s so easy to take these loans out – it takes maybe five minutes on the internet. You almost don’t think about them properly. When you pay a loan back your trust rating goes up, meaning you can borrow even more.”

Research in the US indicates this cycle of debt is common, with the average payday loan customer taking out almost 10 loans a year. Some US campaigners argue that lenders encourage such repeated borrowing to boost profits.

Uriah King from the North Carolina-based Center for Responsible Lending said payday lenders were “utterly dependent” on snaring customers in long-term debt. “If you go to the website of every payday loans company they stress that this is short-term lending to meet a one-off need. But in private, these companies are telling their investors different things. It is a system designed to trap borrowers.”

The Consumer Federation of America takes a similar view, noting that after Washington state imposed a maximum of eight payday loans per year the industry lobbied for its repeal of the law, saying that it made their business unsustainable. The sector insists that Office of Fair Trading rules on irresponsible lending prevent such excesses. British payday loan customers tend to be better off than in the US, they add. However, evidence presented as part of an OFT report last year claimed 30% of payday loans in Britain are not paid off on time.

British debt groups are also concerned. Damon Gibbons, from the Centre for Responsible Credit, said: “It’s very difficult to gauge the situation in the UK because we don’t have access to the same amount of data that is available in the US. UK firms don’t seem to be willing to provide any of this, which would seem to indicate that they have something to hide. There is a risk that this is the same business model operating, and that some people are becoming trapped in a cycle of roll-over loans.”

The Consumer Finance Association, the trade body for many payday loan companies, says it is working on a code of practice which could cover areas such as a cap on loans per customer and affordability checks.

John Lamidey, its chief executive, said: “The UK models are not the same as in the US – nor could they be because of the very high standards of UK regulation.

“Every business wants repeat customers. There is nothing wrong with repeat custom so long as the lending is responsible, which is what the new regulations ensure. If you lend money to those who cannot repay, you go out of business.”