British households will continue to seek out payday lenders despite the collapse of Wonga, campaigners have warned, as tough economic conditions force people to take out high-cost debt.

Wonga filed for administration this week after a flood of compensation claims. The company has an estimated 200,000 customers still owing more than £400m in short-term loans who are being told to continue making repayments.

Although one of the major short-term lenders has disappeared from the market, one leading debt charity believes more than a million people still need quick loans that carry high interest rates. Campaigners say government benefit cuts and austerity, sluggish pay rises, insecure work and the rising cost of living all meant households will face increasing financial pressure in the future.

Peter Tutton, head of policy at the debt charity StepChange, said the market for payday loans was not “done and dusted” in the wake of Wonga’s collapse. “There is a constant stream of people having to use high-cost credit for essentials.”

According to StepChange estimates, around one in seven people across Britain borrowed money to meet a household need last year, with around 1.4 million resorting to high-cost credit. StepChange said the average payday loan debt among its clients last year was about £1,519. Payday lenders still in operation include Sunny Loans and QuickQuid.

Damon Gibbons, the director of the Centre for Responsible Credit, a campaign group, said: “[The collapse of Wonga] is certainly not an end to the UK’s debt problems. The pressures on households remain the same if not getting worse all the time – there is no end in sight just yet.”

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Consumer debt

The Bank of England has become increasingly concerned about rapidly increasing consumer borrowing to levels unseen since the financial crisis, rising at triple the rate of annual growth in pay. Britain’s debt pile from borrowing on credit cards, personal loans and car finance hit a record £213bn last month. The Bank does not separately track the growth in payday lending, which suggests the figures on consumer debt are conservative.

Official figures released this summer showed British households spent about £900 more on average than they received in income last year, pushing their finances into deficit for the first time since the 1980s when access to credit card borrowing boomed.

Economists blame cuts to benefits, lacklustre wages and higher levels of inflation since the EU referendum two years ago, after the rapid devaluation of the pound pushed up the cost of importing goods to Britain.

Although there are fears over spiralling debt problems fuelled by some high-cost providers who can charge more than triple the average quoted rates, credit can provide a valuable lifeline. The Money Advice Service estimates four in 10 UK working-age adults have less than £100 in a formal savings account, and warned consumers would still need to borrow to deal with everyday emergencies despite the collapse of Wonga.

Young people, women and those living outside London and the south-east are typically among the most vulnerable. According to the Office for National Statistics, almost half of 16 to 24-year-olds surveyed between July 2016 and December 2017 said they would be unable to make ends meet for longer than a month if they lost their income.

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Lucie Russell of Barrow Cadbury, who leads the charity’s fair by design campaign pushing for more ethical alternatives to payday lenders, said: “Debt is becoming a bigger and bigger problem. People don’t have enough money and we’re talking about millions of people living in poverty.”

Payday lenders have gradually dwindled in significance after the Financial Conduct Authority imposed a cap on the costs and fees they could charge, so that borrowers would never pay back more in interest and charges than the amount they initially borrowed. The cap contributed towards the collapse of Wonga, although it also faced a slew of claims from consumers over its lending practices.

Campaigners are urging the City watchdog to extend the cap to other forms of borrowing, such as credit cards and overdrafts. Labour has made the measure a policy should it come to power. While there are fears of illegal loan sharks moving in, new lenders have already begun exploiting the gap in the market left by the decline of Wonga, according to the Labour MP Stella Creasy.



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