Chapter One: Introduction – a description of the problem which served as motivation behind the research;
The typical costs of payday loans range from £12.00 - £34.14 per £100 and customers are required to have the use of a bank account for repayment purposes. Throughout this document it becomes clear to PaydayLoan.co.uk that this enables the payday lenders to submit repeat charges, and in some cases where the payday lenders were not complying with best practices, consumers were unreasonably affected by credit. Repeat customers are offered amounts of up to £1000. This suggests that payday loans are provided to a higher income demographic, but there are concerns that payday customers could become trapped in a cycle of repeat borrowing because:
- Credit costs are high, especially ‘rolled overs’
- Loans were available to people with low net incomes
- Payday lenders were advertising their products by comparing charges with unauthorised overdraft fees.
- APRs are extremely high.
These concerns were echoed by qualitative research undertaken by Consumer Focus. They found that lower income consumers were particularly at risk of getting caught up in a cycle of increasing indebtedness.
On the flip side…the research found that higher income borrowers had no problems with these loans and that payday loans fill a gap not currently met by mainstream lenders.
A mentioned OFT rapport stated that “some lenders exercise forbearance when customers experience payment problems and that the level of consumer complaints is low.”
Payday lenders argue that costs are reasonable, with no hidden costs to the consumer and that pending payments, such as direct debits, remained at the discretion of the bank.
Chapter Two: Background to the payday lending industry - a quick description of the current state of affairs;
PaydayLoan.co.uk could derive from chapter two that the UK market is dominated by American companies, UK legislature was not as strict as the US legislature and that the UK regulatory authorities were investigating the industry and a big change in legislature was recommended. The scope of the industry recapped in one sentence; “Originating in the US, the industry expanded into the UK in the late 1990’s and five of the seven largest payday lenders in the UK are still owned or controlled by US companies. It is currently estimated by the Office of Fair Trading that the industry makes over £900 million of loans in the UK per year.”
Chapter Three: The payday debate;
In the US and Canada there was an active debate about the impact of payday lending on default rates and bankruptcies. The evidence here appears to be finely balanced with some studies indicating that payday loans help people to manage occasional financial crises and to avoid defaulting on bill payments, whilst others appear to link payday loan use with increased bankruptcy filings. It is clear that much greater access to payday customer data has been made available to researchers in the US than in the UK.
In order to progress the debate and inform possible regulatory and self- regulatory action in the UK, this report examines the two central issues:
ARE PAYDAY LOANS EXPENSIVE?
We compare the cost of payday loans to unauthorised overdraft charges from five high street lenders and found that whether or not a payday loan will be cheaper than an unauthorised overdraft depends on:
- The charging policies of the bank concerned
- The amount of loan being sought, and
- The level of the specific payday lender’s charges.
We found that those payday lenders who state that their loans are a cheaper alternative to unauthorised overdrafts and bank charges could be misleading some of their customers.
We also compare payday loans to small sum credit card borrowing and find that payday loan charges are significantly more expensive.
DO PAYDAY LOANS TRAP PEOPLE IN A CYCLE OF REPEAT BORROWING?
We found that some loans are offered to low income consumers who were likely to or possibly already experiencing financial difficulties and that there is a danger that some customers could be using payday loans inappropriately. (a more accurate study is needed to determine the scale of this problem.)
We suggest that Payday lenders should take full account of the recent OFT guidance with regard to irresponsible lending.
Chapter Four: Policy responses in the United States and Canada
The question of regulatory options are raised in this chapter, here’s what they were saying;
Reviewing the regulatory approaches in the U.S and Canada, as well as industry codes of practice in these countries we find that:
Payday lending laws in the US and Canada incorporate measures to ensure responsible lending, notably placing restrictions on roll overs’ and the level of fees that can be charged for overdue loans among others.
Some members of the Canadian Payday Lending Association have signed up to a complete prohibition on roll over lending.
In the UK, the Coalition Government has indicated that it intends to introduce a power for regulators to define and ban excessive prices in the credit and store card markets and CFRF considers it appropriate for them to widen the scope of that commitment to include the payday lending market
Chapter Five: Conclusions and recommendations
Summary of Recommendations
Responsible payday lenders should ensure that their charges are transparent, payday loan advertising should be regulated and the OFT should launch an immediate review of the practices of payday lender and take enforcement action against firms which fail to limit roll over lending.
Research into the relationship between payday lending use, credit defaults, and insolvencies is needed.
The FSA and OFT should encourage British banks and credit card companies to establish a small sum credit pilot targeted at customers who have exhausted their overdraft limits, and provide loans to help reschedule commitments, financial education and access to simple savings products.
Approved codes of practice should be developed, which include the following commitments from the industry:
- Loan values not exceeding ¼ of income.
- Multiple, repeats, and ‘roll over lending’ must be avoided
- Borrowers in financial difficulties are assisted in reducing debt without incurring additional charges.
- The industry should increase levels of data sharing.
Government should commit to expanding the scope of its proposed price capping powers for regulators to all areas of the credit market. It should consult on the criteria to be considered by regulators when deciding whether or not to use this power