High-cost lenders use exotic holidays to tempt borrowers into taking on debt

Linda J. Dodson

The City watchdog has taken aim at high-cost credit firms who try to tempt struggling borrowers into taking out large, expensive loans.

In some cases, lenders have enticed customers into borrowing more by suggesting they could use the additional cash to go on exotic holidays.

The Financial Conduct Authority has warned of poor practice among high-cost credit firms after almost half of their customers said they regretted borrowing money. The sector includes payday loan companies, doorstep lenders, store cards and rent-to-own providers.

The research was conducted before the pandemic, but the FCA warned that many borrowers have since entered financial difficulty because of Covid-19. These borrowers are more likely to be vulnerable, have a poor credit record and have little in savings to fall back on.

As well as the firms suggesting customers borrow more to fund luxury holidays, others used underhand tactics to suggest that repeatedly borrowing money was normal behaviour among consumers.

At some firms, repeat borrowers represented more than 80pc of the provider’s customer base.

The regulator’s report said that many firms would advertise that customers could borrow high sums to normalise the idea of taking out large loans, a process known as “anchoring”. Customers are told they can borrow “up to £1,000” to tempt them into taking out larger loans than needed.

Often lender websites would have large sums displayed as the default option, with long repayment periods suggested so that the expensive interest rates appeared manageable. 

In other cases, apps were used to encourage customers to borrow more. The marketing of such loans promoted the ease and convenience of taking more credit, rather than the risk. 

The FCA said that without adequate warnings customers were tempted to take on more debt than they could afford. Some customers were then forced to open new credit accounts to pay off other lenders. This left them juggling multiple credit accounts with no way of paying them all off each month.

The review of 250,000 accounts also found that rising debt levels caused anxiety and stress among borrowers.

Laura Suter of AJ Bell, the fund shop, said the report was a warning shot to unscrupulous firms.

“With debt levels set to spiral amid the end of the furlough scheme and a spike in unemployment, the FCA has warned that some high-cost lenders are acting irresponsibly by continuing to lend money to those already in debt who have no way out,” she said. 

Jonathan Davidson, of the FCA, said: “We have significant concerns that repeat borrowing could be a strong indicator of levels of debt that are harmful to the customer.”

Mr Davidson called on firms to review their practices immediately and make changes to their systems. He added: “We will continue working with firms to raise standards, and we will continue to take action where we see harm.”

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