Payday lenders charging 'unlawful' default fees

Which? has written to lenders to challenge the level of their default fees, which the consumer group believes should be no higher than the administrative costs arising from a borrower defaulting.

The consumer group said that, in its legal opinion, excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999, which state that it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan.

Wonga said its one-off £30 fee for late repayments "reflects the additional costs we incur in collecting these loans" and this has been independently assessed by a business advisory service.

A statement from Wonga said: "As with all our costs, we are completely transparent about our default fee and it's clear to customers when they apply for a loan, and at least three further times before their repayment date.

"On the rare occasions where people can't repay, we always encourage them to get in touch with us so we can do everything we can to agree an affordable repayment plan, including freezing interest and charges."

Richard Lloyd, executive director at Which? said: "We believe payday lenders are exploiting borrowers with excessive fees which can push them even further into debt."

From April, the Financial Conduct Authority (FCA) will start to oversee payday firms. Which? wants the FCA introduce a cap on the level that firms can charge in default fees, as part of a cap on the total cost of credit planned for January 2015.

A spokesman for the FCA said: "We welcome Which?'s interest in this area and we are already considering default fees as part of our work on capping the total cost of credit."

The FCA recently announced plans to crack down on the sector, include limiting the number of times payday lenders are allowed to roll over loans twice, forcing them to put "risk warnings" on their advertising and limiting the number of attempts lenders can make to claw back money if there is insufficient cash in a borrower's bank account to two.

The Competition Commission will produce a report into the payday industry later this year.

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