Money News

The rise of the “zombie” debtor

Wednesday 7 December, 2011

By Martin Fagan

The proliferation of payday loans has given rise to “zombie” debtors who will never pay the loans back.

The surge in payday loans has created a new group of borrowers known as “zombie” debtors, according to new research by R3, the trade body for insolvency professionals.

Zombie debtors are only able to pay the interest generated by their short-term loans and not the debt itself, turning them into the “walking dead” of borrowers who will never pay off modest debts that have spiralled out of control.

One in six individuals is only able to pay the interest on their debt rather than paying off the debt itself, according to R3’s research. This breaks down into 11% who are only servicing debt on their credit cards, and 9% who are only paying the interest charges on their overdraft.

R3's research also shows that, of those sampled who had taken a payday loan, 60% regret the decision and almost half believe the loan has made their financial situation worse. Only 13% believe their payday loan had a positive impact on their finances.

“We hear talk of ‘zombie' businesses, but seeing individuals run their finances in the same way is troubling,” said R3 president, Frances Coulson.

“Hanging on each month simply cannot be maintained forever. Should interest rates rise or their circumstances change, this group will have very few options.

“Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating their financial troubles.”

However, the Consumer Finance Association (CFA), the trade body that represents payday lenders, has questioned R3’s assumptions about the use of payday loans.

John Lamidey, chief executive of the CFA says: “We are surprised to see some of the figures and assertions in the R3 research. Our own independent research has shown that 94% of payday customers are satisfied with the service and crucially that more than nine out of ten customers of a CFA member said they had never felt they were being pressured to extend existing loans.”

Watchdog Consumer Focus says that payday lending has quadrupled over the last four years and, despite – or perhaps because of - APRs of over 1,000%, this is now a billion pound industry. Latest figures from the watchdog suggest 1.2 million of us took out one of the loans in 2009, up from 300,000 in 2006.

The average size of a payday loan is £294, with two thirds of borrowers having a household income of less than £25,000; charges typically range from £13 to £18 in interest for every £100 borrowed.

The watchdog says the current voluntary Code of Practice that regulates the payday loan market is not strong enough and that reform is needed to prevent consumers getting caught in debt traps.

Photo by Joe Mabel