According to the CHASM briefing, the UK’s consumer credit industry had unsecured loans exceeding £157.1 billion in July 2012 and that these statistics rank the UK as one of Europe’s largest in the consumer credit industry. The primary providers of consumer credit remain the banks and credit card companies, but in recent years there has been significant shifts in the personal loans sector of this market. Driven to tighten their belts regarding the limits on liquidity during the 2008 financial crisis and subsequent recession, the retail banks reduced their lending to both small businesses and individuals. As in any recession with rising costs, sluggish wages and uncertainty in the employment sector, this was intended to force more people to seek alternative sources for cash advances.
CHASM argues that this was a supply-side opportunity quickly seized upon by high-cost credit firms and more notably, payday loan companies. These companies have thrived, and more and more consumers are consumed by rising debt.
CHASM has compiled a list of notable statistics about credit providers worth mentioning;
- in the period between 2008 and 2012 the amount of new loans taken out doubled from 4 to 8 million, rising from £900,000 to over £2 billion in value. Supplementing profit for both high-street and online suppliers.
- Here are some profit reporting statistics regarding payday loan companies as researched by CHASM;
- In 2012, DFC Global a market leader and American parent of UK siblings Instant Cash Loans Ltd (trading as The Money Shop and Payday UK), MEM Consumer Finance (trading as MonthEndMoney, PayDay Now and PayDay store) and Express Finance Bromley, saw A collective UK turnover of £347 million (up 55.6% on 2011) and profits of £89.9 million.
- CashEuronet UK LLC (trading as QuickQuid, PoundsToPocket, My Direct Loan and MoneyinMinutes) reported a 45% increase in turnover (to £198 million)
- Wonga saw a 225% rise (to £184 million) and posted profits of £62 million.
Here are some facts CHASM gathered about how credit is affecting consumers;
- Past and current demand comes from a cross-section of individuals: men and women of varying ages, marital status, income and socio-economic group.
- 28% of loans in 2011-2012 were not paid by the end of the agreement.
- If there is a skew in this distribution, it’s towards single males, between 18 and 35, from the lower SEGs earning under £24,500 pa.
- An average loan ranges from £200-£300 for 28-30 days which is paid into their bank accounts, the transmission fees are deducted from the original amount before being paid into your account.
- The lender then authorises the credit provider to withdraw the sum plus interest charges at the end of the loan period.
- For those who can’t meet their deadlines this is the beginning of a cycle of indebtedness.
- A rollover is forced upon them or they have to refinance their advances. This incurs extra fees and interest charges.
- This leads to repeat and multiple borrowing. It’s estimated that 50% of the sector’s revenue is derived from late repayments
- -19% of this coming from those obliged to extend deadlines four or more times.
The report highlights a very relevant fact and proposes that people choose payday loans because of two reasons;
- They might have poor credit histories or limited access to other forms of cash advance.
- Others select the payday option for the convenience or the anonymity of the approval process and the speed money is transferred
The briefing goes on to compare the findings on the cost of lending, and a general view of some payday companies with the views and concerns of the consumers;
- The cost of lending money varies by company, but QuickQuid is indicative in charging £50 per £200 borrowed for 28 days (at a fixed annual interest rate of 326% and representative APR of 1,734%).
- The payday companies maintain that they’re providing an important and useful service in meeting a need for short-term credit. Their charges and repayment practices are justified by as operational costs. They claim that expenses are high and profit margins low; driven by the number of underwritten loans (including those rolled over or refinanced) at existing interest rates with robust repayment strategies. Payday loan companies say that customers are being advised as to all costs of borrowing and the penalties of missing repayment dates.
The oppositions view;
- Consumer groups, debt charities, government agencies, MPs and the media do not agree and argue that costs are excessive, and that many companies offering loans are not upholding standards of responsible lending. They collectively point to methodical evidence of: misleading advertising; scant assessment of credit histories and loan affordability; no clearness in the cost of borrowing; misuse of continuous payment authorities; aggressive debt collection and the mishandling of complaints.
CHASM’s report then reports that combined with case studies of malpractice, encouraging borrowers to extend their loans and harassing late payers, the sector has been described as the “shabby end of the credit market”.
CHASM takes quick look into the glass ball;
Saying that major role players in the industry agree about what is wrong with the sector, but they cannot seem to agree with their proposals for change. Some suggest banning this form of lending like precedents set by several American states and others look to limit its expense by capping either the total price of credit or, more particularly, interest rates and default charges (as in a number of EU countries).
CHASM’s report then highlights the role government is playing by saying that the government is looking at two further measures: - increasing competition among suppliers and, the more popular alternative, stronger payday regulation. In terms of the former, it is both encouraging high-street banks to retake the space they relinquished with new short-term loan products and also promoting credit unions to facilitate cheaper lending across wider communities.
CHASM also notes that the FCA is planning new company requirements regarding: advertising; credit and affordability checks; loan duration and debt collection procedures with strong penalties for non-compliance culminating in the loss of their trading licence.
The briefing concludes with a sceptical review of the current situation, calling the industry a coalition of politics with no way of knowing the outcome. All seem to agree that new horizons are planned for UK payday lending, and until then many consumers will be soft targets to random and errant financial practice in an industry not regulated with the necessary authority.