News In Focus

GLC proposes way out for payday loan borrowers

5 September 2012

A scheme to help people trapped in a cycle of payday lending from month to month has been proposed by Govan Law Centre.

While a new code of practice covering the main lenders was recently agreed at UK level, GLC says that from its casework experience there remains evidence of "significant consumer detriment", and arguably significant mis-selling taking place.

Without an early prospect of UK consumer credit law reform, GLC has put forward a "Fast Track Debt Arrangement Scheme", for which Scotland could legislate under devolved powers, under which consumers trapped in loans that roll over from month to month at very high rates of interest, would be able to repay the sum borrowed with interest re-set at an equivalent of 8% per annum. A condition of entry could be taking free financial and money advice and access to a credit union.

Debt Arrangement Schemes under the Debt Arrangement and Attachment (Scotland) Act 2002) require all debts to be paid via an agreed debt payment programme. They often run for several years but have fewer negative consequences than bankruptcy. The GLC proposal would adapt this to apply purely to  a borrower's payday loans, perhaps with a maximum threshold of £5,000 and a requirement for the principal sums borrowed to be repaid within 24 months.

"It would be targeted on usury rate interest loans in Scotland, and ultimately we could create a device which prevented companies from exploiting vulnerable consumers, because they would not be unable to profit from usury rates of interest and/or rolled up charges", GLC's principal solicitor Mike Dailly said.

He added that arguably ministers already have power to set up such a scheme under sections 7 and 7A of the 2002 Act, as amended.