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This page gives an overview of the complaints the Financial Ombudsman Services receives about short-term lending such as payday and instalment loans. It is intended for businesses, advisers and complaint handlers who are looking for more technical detail about our approach. It looks at the key law, rules, and other standards that apply in this area and how problems can be resolved fairly.

Our approach is based on those cases that we have seen. So this may change in light of cases we receive in the future. We may also decide to adopt a different approach to a particular case to ensure we reach a fair decision.

The law requires us to assess each case on the basis of our existing powers - and what is fair and reasonable in the circumstances.

what is short-term lending?

When we refer to short-term lending, we’re generally talking about payday loans and instalment loans – but it also includes things like open-ended credit facilities.

These types of products are often marketed at people with limited access to mainstream credit. And although the amounts of money involved may be relatively small, the interest rates are high. Because of the costs involved, they aren’t intended for long-term borrowing and usually run for up to 12 months (although some can be slightly longer).

Up until 31 March 2014 short-term lending came under the scope of the Office of Fair Trading (OFT). After this time the Financial Conduct Authority (FCA) became the regulator and introduced the definition "high-cost short-term credit". To satisfy this definition, the lending needs to:

  • have an APR of 100% or more
  • be due to be repaid or substantially repaid within 12 months
  • not be secured lending, home credit or an overdraft.

We’ve outlined below some of the key things we consider when deciding what’s fair and reasonable in complaints about short-term lending.

what kinds of products have we had complaints about?

payday loans

This product is probably the most well-known type of short-term lending. They usually involve someone borrowing between £50 and £1,000, to be repaid, plus interest, on or shortly after their next payday. This means the capital and interest must be repaid in full, in one instalment.

Some lenders will allow borrowers to “roll over” their payday loan (see the next section). If this happens, at the time the original capital and interest is due, the borrower will only pay the interest. Then approximately a month later (typically after their next payday) the borrower will repay the full amount of interest and charges. In some cases we see this has happened several times.

Some lenders will also allow customers to “top-up” the amount borrowed. This generally involves the borrower asking for extra money after taking the initial loan, which will be repaid (plus interest) at the same time as the original loan was due.

instalment loans

Here, a borrower takes out a loan with multiple repayments, which are usually made monthly. The term of the loan can vary – and we see a range of repayment arrangements, ranging from two repayments up to around 12 or sometimes more. Some lenders also allow overlapping loans, so their customer will be able to take out further loans whilst they’re still repaying a previous loan.

Some types of instalment loans:

  • equal instalment loans
  • The total amount repayable is spread across the whole term equally, so each month the customer would repay the same or similar amount. This means that the customer is paying interest and making payments towards the capital.

  • varied repayment instalment loans
  • The amounts the consumer is required to pay differs from month to month, usually with the highest amount being due in the second or third month.

  • repayment loans with balloon payments
  • The customer only repays the monthly interest each month until the last repayment date when they must pay back the total amount borrowed and the last month interest. Sometimes, this is referred to as a “payday loan with deferred repayment option”.

revolving credit (also known as flex credit or running credit)

This is an open-ended credit agreement, which allows the borrower to make multiple draw-downs as long as it's within the credit limit. Although there’s no fixed end date, the credit is intended for short-term use only because of its high interest rate. Loan agreements may include a hypothetical repayment schedule over ten months.

complaints we see

In general, the complaints people bring to us about short-term lending involve the borrower saying their loans were unaffordable and that they believe the lender acted irresponsibly in providing the credit.

The information below outlines the key considerations for us when we’re investigating and resolving complaints about short-term lending.

We also see complaints where the borrower says they're experiencing financial difficulties and can't repay their loans and they think the lender isn't treating them fairly.

You can read more about our approach to complaints involving financial difficulties and unaffordable lending.

our approach - how does the ombudsman look into short-term lending complaints?

In the same way as for other types of complaint, when someone contacts us about short-term lending we’ll ask:

  • Did the business do everything it was required to do?
  • And if they didn’t, has their customer lost out as a result?

As a reminder, our answer to a complaint will reflect what’s fair and reasonable in the circumstances. And in considering what’s fair and reasonable, we’ll consider relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what we consider to be good industry practice at the time.

In light of this, for short-term lending we’ll ask questions such as:

  • For each loan, did the lender carry out reasonable and proportionate checks to satisfy itself that the potential borrower would be able to repay the loan in a sustainable way?
  • If they didn’t carry out these checks, would reasonable and proportionate checks have shown that the borrowing could have been repaid sustainably?
  • Given this type of loan is intended for short-term use only, did the overall pattern of lending increase the indebtedness of the person involved in a way that was unsustainable or otherwise harmful?
  • Did the lender act unfairly or unreasonably in some other way?

what’s the key law, rules and other standards that apply?

Although this information isn’t exhaustive, there are a number of key laws, rules and standards that lenders need to consider – and which they and we will need to take account of when looking into complaints from their customers.

In summary, it’s clear from both the OFT’s Irresponsible Lending Guidance and the FCA’s Consumer Credit Sourcebook (CONC) that both regulators required an assessment of affordability which was proportionate – to determine if a prospective borrower would be able to repay their loan. And both regulators provided guidance that lender could consider when completing this assessment.

In addition, both regulators have stressed that these products aren’t suitable as a longer-term source of credit – and that there’s potential for consumer detriment if they are used in this way.

the Office of Fair Trading (OFT) and the Consumer Credit Act 1974

  • Before April 2014, the relevant regulator was the OFT. The Consumer Credit Act 1974 (CCA) set out the factors which the OFT needed to consider when deciding whether to give a business a consumer credit licence. In deciding this, one of the factors the CCA says should be considered is if there’s evidence of business practices involving irresponsible lending.
  • The OFT also required lenders to complete a “borrower-focussed” assessment of affordability, to see if the prospective borrower could have afforded to repay the lending in a sustainable manner. This is set out in the OFT’s March 2010 guidance for creditors for irresponsible lending.
  • There was no set list of checks a lender needed to complete. But the checks should have been proportionate to the circumstances of each loan – which might include considerations about the amount borrowed and the prospective borrower’s borrowing history. Section 4.12 of the Irresponsible Lending Guidance gave examples of the types and sources of information a lender might want to consider. In 2011 an assessment of creditworthiness also came into force in the CCA.
  • Looking in particular at repeat lending, section 6.25 of the OFT’s Irresponsible Lending Guidance said, in relation to short-term loans, that it would be a deceptive and/or unfair practice (which in the OFT’s view may constitute irresponsible lending practices) if a lender were to repeatedly refinance (or 'roll over') a borrower's existing credit commitment for a short-term credit product in a way that is unsustainable or otherwise harmful.

Section 6.25 also said:

  • The OFT considers that this would include a creditor allowing a borrower to sequentially enter into a number of separate agreements for short-term loan products, one after another, where the overall effect is to increase the borrower's indebtedness in an unsustainable manner.
  • The general purpose of short-term loans, such as 'payday loans', is to provide borrowers with a cash advance until their next pay day and they are usually about 30 days, or just over, in duration. However, in certain circumstances, the borrower can elect to 'renew' the loan for a fee and delay payment for a further agreed period of time.
  • The purpose of payday loans is to act as a short-term solution to temporary cash flow problems experienced by consumers. They are not appropriate for supporting sustained borrowing over longer periods, for which other products are likely to be more suitable.
  • The Financial Conduct Authority (FCA)

    The FCA took over the regulation of consumer credit from the OFT in April 2014. The Consumer Credit Sourcebook (CONC), part of the FCA’s handbook refers to various sections of the OFT Irresponsible Lending Guidance (including section 6.25).

    CONC is clear about the need to complete a “credit worthiness assessment”, considering the potential for the lending commitment to “adversely impact the consumer’s financial situation”. (CONC R 5.2.1 (2)). CONC replaced the sections of the CCA highlighted above.

    • From July 2014 the FCA introduced a rule that high-cost short-term lending couldn’t be refinanced on more than two occasions (unless exercising “forbearance” – to help a borrower in financial difficulties). This is set out in CONC 6.7.23. R.
    • On 2 January 2015, the FCA also introduced a price cap on the interest and charges short-term lenders can charge. This came into force from 2 January 2015. The main points are:
      • daily interest and fees must not exceed 0.8% of the amount borrowed
      • default fees should be no more than £15 in total; and
      • the total interest, fees and charges (including those on any connected agreement) shouldn't be capable of coming to more than the amount borrowed.

    For more details see CONC 5A.

    • CONC 5.2.3 [G] outlines that the assessment the lender needs to complete should be dependent on, and proportionate to, a number of factors – including the amount and cost of the credit and the consumer’s borrowing history. CONC 5.2.4 [G] provides guidance on the sources of information a lender may want to consider as part of making a proportionate assessment. And CONC rules specifically note and refer back to sections of the OFT’s Irresponsible Lending Guidance.
    • Looking in particular at repeat lending CONC 6.7.22G says:
    • A firm should not allow a customer to enter into consecutive agreements with the firm for high-cost short-term credit if the cumulative effect of the agreements would be that the total amount payable by the customer is unsustainable.

      Note this guidance specifically refers back to ILG 6.25.

putting things right

If we think something has gone wrong with short-term lending – and the borrower has lost out as a result – we typically say the lender should refund the interest and charges their customer has paid, adding 8% simple interest.

Our starting point is that the borrower has had the benefit of the money they borrowed, so it’s fair that they should pay it back. But there will be some circumstances when we don’t think this is fair. One example might be where the borrower now has more pressing priority debts, which there would be serious consequences of not repaying (see this case study).

We’re also likely to tell a lender to make sure their customer’s credit file doesn’t have any adverse information recorded about the loans we’ve identified as unaffordable. If we decide that someone's pattern of borrowing has become clearly unsustainable, we’re likely to tell the lender to get these removed from their customer’s credit file completely.

need help?

If you can’t find what you’re looking for here - or you’d like to talk to someone - give us a call.

our technical advice desk (information for businesses and consumer advisers) - 020 7964 1400

our consumer helpline - 0800 023 4567

ombudsman news

Our regular newsletter for people interested in financial complaints, and how to settle or prevent them, is available to read online or download here.