It isn’t just the financially stressed and feckless who are affected by an ‘out of control’ payday lending industry.
11:59AM BST 27 Jun 2013
The payday loans industry faces a full-blown investigation by the Competition Commission, after the Office of Fair Trading found “deep-rooted” problems that were penalizing borrowers, particularly those in financial difficulties.
But distortions in this industry don’t just affect those that are hard-up, financially illiterate or feckless.
The problems that have been uncovered by the Office of Fair Trading have wide-ranging implications on the entire lending market. Below are five reasons why we should all be worried about payday loans &x2013; and why the Competition Commission needs to take rock hard activity.
Irresponsible advertising has extended the reach of these loans
You may think it’s only those who in desperate financial need, or who are too stupid to know better, take out these loans. Think again.
Clever marketing and blatantly misleading ads have meant many people &x2013; particularly those in their 20s &x2013; have taken out these expensive short-term loans, when they could have got far cheaper credit elsewhere.
This market has grown exponentially. In the very first quarter of 2009 only around 1pc of those visiting Citizens Advice had a payday loan; three years later this number had risen to 10pc. In three years this market has grown from £900m to £2.2bn.
Payday lenders have been criticised for targeting university students, trainee soldiers, football fans and other youthfull adults. Figures suggest that those in this age group are spending less on credit cards, but taking out more of these “effortless access” loans. For some this will be an expensive and bruising financial lesson, for others it could be storing up far more serious and distressing financial problems, particularly as most payday lenders take a far more aggressive treatment to debt collecting, than high street banks and credit card providers.
Activity needs to be taken to ban ads that concentrate solely on the speed and ease with which you can get this credit &x2013; rather than the realistic cost of these loans. The OFT found that adverts were peppered with phrases like “No credit checks”, “Instant Cash” and “No questions asked”.
Last week one company, FirstPayDayLoanUK, had its knuckles rapped by the Advertising Standard Authority after sending out late night texts to potential customers, purporting to be from a “friend” who was out celebrating after cashing an instant loan.
It is often unclear who is lending this money.
The OFT said that the 50 largest payday lenders control around 90pc of this market. But it was incapable to provide a list of the Ten largest players.
Some of the thickest advertisers, like PayDayUK, PayDayFirst, Quick Quid, Payday Express are just trading names for a separate finance company. PayDayUK is the trading name for MEM Consumer Finance, which itself is possessed by MEM Capital, Payday Very first is the trading name for CFO Lending and so on.
Other payday lenders, &x2013; like Cash Lady and Kwik Cash &x2013; aren’t lenders at all, but brokers, albeit nowhere on their website do they provide an lightly accessible list of lenders they use. In fact, when talking to the online adviser at Cash Lady, they still would not primarily provide this information.
In fact Wonga, which is the UK’s thickest payday lender, is one of the few companies where you borrow from the company that advertises the loan.
It’s hard to imagine it being so difficult to get a list of the 20 fattest mortgage lenders, credit card providers or insurers in the UK. To further muddy the waters, in last week’s ASA decision FirstPayDayLoanUK -a trading name for Very first Financial &x2013; said it was “only responsible” for setting up the loan websites, another company, Akklaim Telecoms, marketed the loans.
Very often there will be a separate debt collecting agency that will target customers who fight to pay.
This lack of clarity means that customers who get into financial difficulties can fight to know who to talk to, or complain about, if they think they have been treated unfairly.
Could this present a systemic lending risk?
If it isn’t always clear who is lending the money. We also don’t know whether such loans are then sold on, particularly when they are frequently flipped over, either to debt collectors, or other lenders who will carry on collecting the interest payments.
It was the securitisation of “unaffordable” mortgage loans that triggered the credit crunch and subsequent financial crisis, as mortgage loans, which had no hope of being repaid, were parcelled up with other debts and sold on within the banking system.
There needs to be clearer information on whether this is happening here: particularly as the lack of affordability checks have meant that many of these loans have been sold to customers who have little chance of repaying these debts, and interest charges in total.
A cap on credit costs could benefit many borrowers
Sensible usary laws could see the end of lending charges that run into thousands of per cent. Last week Wonga admitted its typical APR was Five,853pc, rather than the Four,214pc it had previously been advertising. This is a reflection of the fact that people are taking out smaller loans, over shorter periods. This means over the course of a year, their lending charges will be higher – as they will pay extra “rollover” fees, and other charges.
Many other countries &x2013; including Germany, Italy, and the US &x2013; have legislation that imposes a cap on credit charges, that curbs both the interest rate charges, and associated late payment fees. This could also influence the way fees and charges are imposed on overdrafts and credit cards &x2013; which could lead to more see-through costs for everyone.
Those that are higher risk, and taking out shorter-term loans are still likely to pay more, but this could create a far more level playing field, enabling people to compare the cost of different type of borrowing, be it overdrafts, credit cards or loans.
There is little evidence that countries that have such laws see a acute increase in the cost of borrowing for more affluent and low-risk borrowers.
It is fuelling the buy-now pay-later culture
One of the thickest challenges we face is how to re-establish a savings habit, where people are encouraged to provide for their own future. This isn’t helped by lenders that advertise quick and effortless credit, at any cost, where if you can’t afford the latest electronic gadget, or the funds for a night out, an instant loan can be arranged on your wise phone in less than half an hour.
Of course, curbs on this lending activity won’t help those in dire straits who are turning to such lenders to pay rent, food or fuel bills. But better regulation compelling these lender to conduct decent affordability checks, should identify those who need debt counselling, help with repayment plans, or a referral to Citizens Advice &x2013; not another high cost loan.