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Payday lenders' fees could be against the law

The fees charged by many 'payday' loans companies to their customers when they miss a repayment could be unlawfully high, according to consumer organisation Which?.

Payday lenders could face legal action after a consumer group survey revealed that many of the companies' charges for default on repayment could be in breach of the law.

Which? investigated 17 leading payday lenders and found that ten had standard default charges of £20 or more, four charged defaulters £25, and Wonga, the popular high-street lender, topped the chart charging defaulters £30.

Payday lending has boomed during the UK financial crisis, as poor families and individuals struggling to make ends meet are often barred from accessing conventional, and relatively inexpensive, sources of finance such as overdrafts and loans.

Instead many are forced into the hands of payday lenders, whose premises have sprung up on high streets across the UK. Such companies offer small quantities of cash, often up to £1000, on short-term loan deals with extortionately high interest charges that can overrun to several thousand percentage points per year.

In addition to high interest charges, the firms also hit customers with fixed fees for defaults on payment and other service charges.

Which? believes that high default charges are in contravention of the Unfair Terms in Consumer Contracts Act 1999, which states that lenders cannot charge disproportionately high fees when borrowers default on loans.

Although the charges themselves do not seem high, when compared to the often small amounts of money borrowed they do amount to a high percentage of the overall loan.

Which? has now written to the worst offenders, to remind them that charges for default should be no higher than the cost of administration and should not penalise those who default.

In a statement Wonga said: "We charge a one-off default fee of £30 on late repayments that reflects the additional costs we incur in collecting these loans. This charge has been independently assessed as reflecting these expenses."

However, the chief executive of Consumer Finance, Richard Lloyd, said that Which? would continue to press for a revision of charges.

"If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers," he told The Independent.