Although payday loans only account for a small proportion of the cases we see, it is a growing area of concern. We are now receiving around 30 to 40 cases each month - a 75% increase on last year - and we are currently finding in the consumer's favour in nearly three quarters of those complaints.
Many of the complaints we see involve the lender's use of the "continuous payment authority" that the consumer gave it - which allowed the lender to collect payments directly from the consumer's bank account.
Typical problems involve payday lenders trying to take payments unexpectedly - or repeatedly attempting to take payments when the consumer has already explained that they don't have enough money to cover the debt. We also see complaints about unaffordable lending and about the debt recovery methods used by some payday lenders.
We see a number of payday loan complaints from consumers who say they never even took out the loan in question. And we do come across situations where fraudsters took out loans in other people's names.
The following case studies illustrate some of the more common problems that we see in complaints involving payday lending, including:
Miss B was struggling to keep on top of her finances. After an unexpectedly high electricity bill, she decided to take out a short-term loan to tide her over until she got paid again.
She borrowed £250 from a lender and agreed that she would pay back £280 within 30 days. She set up a continuous payment authority to allow the lender to take money directly from her bank account.
Just before the loan repayment was due, Miss B realised that she wouldn't have enough money to cover it. She decided to get help from a debt management company. She phoned her lender to let them know that she was entering into a debt management plan. At around the same time, the debt management company wrote to the lender to confirm the arrangements.
But soon afterwards - on the original repayment date - the lender tried to take the payment from Miss B's account. There wasn't enough money to cover it in full.
Miss B was shocked to discover that the lender had tried to take the £280 from her account so soon after she had phoned to tell them about her financial difficulties and her debt management plan.
Miss B complained to the lender. She said that the withdrawal they had made had made her financial problems much worse. She sent the lender a copy of her bank statements, information about her debt management plan and details of her income and expenditure.
The lender turned down her complaint. It said that because neither Miss B nor her debt management company had made an offer of repayment, it was unable to put her account on hold or stop the continuous payment authority.
We looked carefully at the information that Miss B had sent to the lender - and at the lender's own records. We saw that the business had recorded that Miss B was having financial problems following her phone call - and that she had a debt management plan in place. But we also noted that the lender had acted very quickly in taking the payment.
We took the view that when the continuous payment authority failed, the lender should have been alerted to the fact that Miss B was having problems paying off her loan. We didn't accept the lender's argument that it needed "an offer of repayment" before it could respond to Miss B's difficulties.
We recognise that it is good practice across businesses in this sector to suspend payment for 30 days so that a consumer has the opportunity to set up a repayment plan with a debt advice agency. This gives the consumer the opportunity to send in more information, and allows the debt management company the opportunity to negotiate on the consumer's behalf. In these circumstances, we decided that the lender had acted unfairly by taking the repayments so quickly.
We told the business to refund Miss B the money it had taken from her account, plus interest. We also told it to pay her £150 for the inconvenience it had caused her. To help Miss B move forward, we told the business to work with her debt management company to set up a repayment plan that she could afford.
Mr V's son was studying at university and was having trouble keeping on top of his finances. He had taken out a number of short-term loans with different companies. When he realised that he wouldn't be able to pay the money back, he asked his father to help him out. Mr V used his debit card to pay off the loans and his son paid him back over the next few months.
Some time later, Mr V's son took out another short-term loan with one of the lenders he had already used. He couldn't keep up with the repayments so the lender took the money directly from Mr V's bank account. The lender took seven payments - totalling over £900 - from Mr V's account over the course of a month.
Mr V contacted the business to complain. He said that he hadn't even known about the loan - and that it was unacceptable for the lender to have taken money from his account without his knowledge. The lender apologised to Mr V. It said it must still have had his account details on its records from when he had paid off a different loan for his son previously.
The lender said it would take Mr V's card details off the system. But Mr V felt that he had been treated unfairly - and he decided to bring his complaint to us.
We asked the lender for its records relating to the loans that Mr V's son had taken out. We noted that Mr V had supplied his card details to pay off an earlier loan - but that he hadn't had any contact with the lender over the latest loan. So we concluded that the lender must have used the card details that Mr V had supplied before.
The lender had already removed Mr V's card details from its system. But we needed to decide whether it had done enough to put things right. We could understand Mr V's concerns about the money being taken from his account without his permission - and we could see that it had had a significant impact on his finances.
The lender had shown us that it was keen to put things right. So it agreed to our suggestion to refund Mr V the full amount, plus interest. However, we recognised that in repaying Mr V, the business now needed to pursue repayment of the loan with his son. The lender agreed to contact Mr V's son to set up a repayment arrangement for the outstanding balance.
Mr N was having some building work done on his house. The costs had been mounting and as the builders were finishing off the work, Mr N was getting anxious about the final bill.
He took out a 30-day loan to cover the building work - and to make sure he could meet his regular outgoings. But the invoice from the builder was a lot higher than Mr N had been expecting. He realised that he wouldn't be able to pay the builder, cover his regular outgoings and pay off the loan by its due date. So he contacted the lender to let them know he wouldn't be able to pay off the loan.
Over the next few months, Mr N managed to reduce his outgoings and put money aside to pay off his loan. He kept in regular contact with his lender to let them know what he was doing.
Six months later Mr N had saved enough money to pay off his loan. The lender accepted his payment and closed the account. It also said that it had updated Mr N's credit file to show that he had settled the account.
But when Mr N checked his credit file a month later he found that the lender had registered a default against his name two months after he had taken out the loan. The default was now showing as "satisfied".
Mr N was worried. He hadn't realised that there was a default against his name - and he was concerned about the impact it was having on his credit rating.
Mr N phoned the lender to find out what had happened. They said that they had sent him a letter telling him that it was going to register a default on his credit file. Mr N didn't remember receiving a letter about this - and he knew that he was normally very good with his correspondence. Unhappy with the lender's response, he brought his complaint to us.
We asked the lender to send us the all the correspondence that was relevant to the case. But they told us that they couldn't send us a copy of the default notice - or an extract from their records to show it had been sent - because their records system had recently been "updated". This meant they didn't have a copy of the original notice or any records to show us that it had been sent.
However, the lender was able to send us a copy of the terms and conditions for the loan. It pointed out that if Mr N had read them, he should have been aware that it could register a default against his name if he didn't pay off his outstanding balance in time.
Although we accepted this, we explained to the lender that it was required to send out a notice of default to the consumer 28 days before the default was registered. We pointed out that because they couldn't show us a copy of the default notice - or any evidence that showed that the notice had in fact been sent - we couldn't be sure exactly what had happened.
When we explained to the lender that Mr N felt certain he hadn't received a notice, it agreed to remove the default - and to amend his credit file. Mr N was happy with this outcome.
Mr S ran a successful outdoor clothing and equipment shop in the north of England. Since he had got the shop up and running, his finances had been secure - and he felt he was on top of all his financial arrangements.
So he was surprised when he received a letter from a short-term loan business saying that he owed over £500 on his loan. Mr S just thought there had been a mistake. He threw the letter away and forgot all about it. A month later he received another letter - this time demanding more money.
Mr S wrote to the lender to let them know that they had the wrong person, and that he didn't have a loan with them. He asked them to stop contacting him and to remove anything that they had put on his credit file about this loan. Mr S didn't get a response and a month later he received another letter asking him to repay the increasing debt.
Mr S wrote to the lender again. This time he asked for compensation for the inconvenience he had been caused. The lender wrote back and said that they would take his name off the debt - and remove the information they had put on his credit file. But they said they would not pay him any compensation because they had already made a loss on the outstanding debt.
Mr S was unhappy with this response and asked us to look into the complaint.
Before a rule change that came into effect on 1 January 2012, we were not able to look at a complaint like this - where a consumer was not actually a customer of the business. Because the events in Mr S's case took place after that date, we were able to look into his problem.
When we looked at Mr S's bank statements, we noted that his finances were secure and, in our view, he was unlikely to have taken out a short-term loan.
We asked the lender how the original mistake had been made. It told us that it felt that it had taken the necessary steps to identify the consumer who had originally taken out the loan. When we looked at the lender's records, we noted that the debit card that had been used to take out the loan had been registered to Mr S's address.
We asked the lender whether Mr S's name had been on the card. They said that their validation process involved matching the card to the address - but admitted that the card could have had a different name on it and still been validated.
In these circumstances, we concluded it was likely that someone else had fraudulently set up a loan in Mr S's name - and that the lender hadn't realised what had happened.
We accepted that the lender had taken a loss when it had taken Mr S's name off the loan. But we pointed out to the lender that Mr S was an innocent party - and that he had been inconvenienced by the original mistake and by the way it had handled his complaint. So we decided that Mr S ought to be compensated for the trouble he had been put to.
We told the business to pay Mr S £100 to compensate him for the inconvenience he had been caused.
Miss C lived at home with her parents. She had just graduated from university and had recently been offered a job. But she was fast approaching her overdraft limit and she wanted to go on holiday before she started work. She decided to take out a short-term loan for £350 to pay for her holiday. Unfortunately, the job offer fell through and Miss C was unable to repay her loan.
Miss C asked her mother to help - and with her permission, went online and used her mother's credit card to pay off the £350 she had borrowed.
A few days later, the lender took another payment from the credit card. Miss C and her mother were unhappy that this extra payment had been taken without their permission - and Miss C rang the lender to complain. The lender offered to return the payment.
It explained that because Miss C had used a credit card to make her payment, it would need details of a different account so it could return the money. They also explained to Miss C that she would still then have an outstanding balance on the loan that would need to be paid off.
Miss C didn't want to give the lender any different bank details because of what had happened before. And she felt that the lender should pay compensation for taking the unauthorised payment. When the lender rejected her complaint, she decided to refer the matter to us.
complaint not upheld
We asked the lender to supply screen shots of their website so that we could see what information Miss C would have been given when she had paid with her mother's card.
We noted that the website said that "once you have added card details to your account we will be able to collect future repayments from this card until you remove it". It also said that "you should not add a card that doesn't belong to you".
When we looked at Miss C's loan account, we noted that the original payment she had made using her mother's credit card hadn't covered the outstanding debt. She had only paid off the amount she had borrowed - and she had still owed the lender the interest on the loan. The lender had taken the additional payment to clear the balance.
Taking all this into account, we concluded that the lender had not acted inappropriately. Their website had brought to Miss C's attention the fact that any card details entered into their payment system might be used again - and the payment in dispute had been used to clear her outstanding debt.
In these circumstances, we considered that the lender's original offer to refund the additional payment had been reasonable. That would leave an outstanding balance on the loan - and we agreed that Miss C would need to repay that amount if she wanted the additional payment to be refunded.
Mr H had recently moved house, and he took out a short-term loan to pay for some of the moving costs. Unfortunately, he found he wasn't able to pay off his loan on the due date - and he deferred payment four times. He managed to pay off his loan in full five months after he had taken it out.
When Mr H checked his credit file a month later, he was surprised to see that the lender had recorded five separate loans for each of the five months he had taken to pay the loan back. Confused and upset, Mr H contacted the lender to ask what was going on.
The lender explained to Mr H that each time he had deferred repayment, it was the equivalent of taking out a new loan. The lender also said that Mr H would have been told each time he had deferred payment that this would happen.
Mr H was adamant that he hadn't known about this. But when the lender refused to change its position, he decided to come to us.
complaint not upheld
The lender told us that each time Mr H had applied to defer repaying his loan, he had been sent an email that explained what would happen.
Although the lender couldn't send us copies of the emails, they did give us templates of the emails in their system - and records to show the circumstances in which these would be sent. We were satisfied that Mr H would have received an email explaining the situation each time he deferred his payment - as well as giving him an ID number for a new loan.
In these circumstances, we concluded that the lender had made it clear to Mr H that the original loan had been discontinued and replaced with a new one each time he had deferred his repayment.
We explained to Mr H that the lender was responsible for making sure that his credit file reflected his borrowing activity accurately - and that taking everything into account, we concluded that the lender had acted correctly.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.