A new Which? investigation found that ten of 17 leading payday lenders have default fees of £20 or more, and four charged £25 and above, with Wonga topping the table at £30.
Which?'s legal opinion is that excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs), which state it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan.
Which? has now written to the worst offenders to challenge the level of their default fees, which it believes should be no higher than the administrative costs associated with defaulting.
High charges are one of the biggest factors that tip borrowers into a spiral of debt. Previous Which? research has found that more than half of payday loan users (56%) had incurred charges for missed or bounced credit repayments over 12 months, compared to 16% for all credit users. One in five payday users (20%) said they had been hit with 'unexpected charges'.
Some payday lenders impose significantly lower default charges of £12. In 2006, the Office of Fair Trading found that penalty charges for credit cards should be no more than £12, unless there are exceptional factors.
Which? has been calling for the Financial Conduct Authority to introduce a cap on the level that firms can charge in default fees, as part of the cap on the total cost of credit planned for January 2015.
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.
“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.
“The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders’ costs.”