Industry Overview

As with most of our important pages this one is split into three sections. The first section is designed to give you the fast facts about the payday lending sector. The second section is designed to give you a much more in depth understanding of the payday loans industry. Finally the third section is where we put all of our in depth articles on the topic. If you find our information helpful please feel free to share it on social media etc.

A Quick Overview

The UK payday loans industry exploded from one Money Shop (owner by the Dollar Financial Corp.) in 1992 to thousands of multi-lender outlets, offering the availability of quick and expensive short-term loans from high-street shops and online Internet businesses, coinciding with the financial crash of 2007-08, when credit became difficult to obtain from mainstream banking operations.

A lack of regulation and irrespobsible advertising and debt collection saw industry loans increased from £900 million in 2009 to over £2.2 billion in 2012.

The public image of the industry has varied between an essential requirement for many millions of individuals needing cash to get through to the end of the month, to legalised loan sharks capitalising on people’s lack of ability to raise finance elsewhere and aiming to keep their customers in debt for decades.

On 13 November 2012, the Sun newspaper suggested that one in 10 people would seek the use of a payday loan over the following six months; that 25% of 18 to 24-year-olds will require a payday loan, “just to get by.” You may not always believe what The Sun prints, but even if their figures are way off from being correct, that is still an enormous amount of people looking into and using payday loans.[1]

The introduction of new and upgraded legislation and regulation in 2014, has changed the industry beyond all recognition, with further changes planned for 2015.

The payday loans industry is changing rapidly and is a combination of trying to match the individual requirements of UK residents and the moral codes against high interest rates and hounding of poor people fighting to get out of debt - but with nowhere to turn except debt advice charities. Insert link to debt advice charities

A Not so Quick Overview

The earliest forms of banking will have resembled the recent and unregulated payday loan market, before the 2014 regulation. With a lack of guidelines, the lender could charge whatever fees and interest that their customer is willing (although wishing to be disinclined) to pay. The institution of pawnbrokers has existed for just as long, and introduced the concept of offering security against a loan, but not everyone has security to offer and this exchange of goods for money slows down the process for the customer that needs cash in a hurry.

During the 1970s and then, predominantly during the 1980s, credit cards became available for almost everyone, where banks paid no particular attention to confirming the details from an application form. Almost everybody could build up a collection of credit cards and unsecured debt that would last many months and years; starting to begin as a way of life of constantly chasing debt and not quite managing to beat it.

Loan sharks have operated illegally for as long as formal banking operations have forced individuals to look elsewhere for their cash flow finance. Many claim that loan sharks and the original payday lenders were not so far apart in their consideration of interest rates charged and debt collection methods.

Over in the United States

Federal law in the US introduced a cap (36%) on loans to military personnel in 2007. So as the American payday loans industry began to accept regulation, many lenders saw the opportunity to move into an unregulated marketplace in the UK, just as the world recession was beginning and bank lending became almost impossible to achieve, even for those with a great credit record.

Nevertheless, there has always been and probably always will be a large selection of society that is unable to meet the current rules and regulations required by mainstream banking operations and for those individuals living on low income and with very little savings, if any, the economic demands of supply and demand require that cash loans are available for people in need.

From relatively humble beginnings in 1992, The Money Shop was essentially an establishment where customers could cash cheques, for a relatively modest commission moving to the shop owner. By 2009, Dollar Financial Corporation had increased to almost 300 high-street shops and over 60 franchises across the UK.

The marketing and advertising by payday lenders has educated the consumer marketplace about the availability of these loans, while strong word-of-mouth has encouraged individuals to find the locations of easy and quick cash advances, where the main concern is just to receive the cash, not to particularly consider the interest rate or the APR. Link to APR page

The credit crunch saw UK banks stall on their ability to lend money to easily qualified applicants, but most certainly to refuse individuals with lower income, considerable debt and without predominantly good future prospects. Particularly, younger people have been attracted to the payday loans operators because of their inability to raise finance elsewhere.

In recent years, payday lending in the US is now regulated within 37 states. In the other 13 it is either illegal or un-operable because of local state laws. Usury as defind by Wikipedia is the practice of making unethical or immoral monetary loans intended to unfairly enrich the lender.[2] This limits excessive interest rates shown as comparable APR’s. Link to APR webpage. The US has introduced a cap on the number of loans for borrowers each year, the number of rollovers, interest rates and restrictions and mechanisms that govern fees and charges. The UK regulation could have matched these rules during the past decade, but the government has allowed payday lending to get out of hand during the recession years before finally bringing in legislation in 2014 and 2015, and regulation by the Financial Conduct Authority (FCA.) link to FCA webpage

In June, 2013, the Office of Fair Trading referred the entire payday lending market to the Competition Commission (now the Competition and Markets Authority since 2014[3] ) as they suspected the lenders may have been operating anti-competitively , which may restrict prevent, restrict or distort fair competition.[4] 

Following the enquiry, 15 of the 50 investigated lenders exited the payday market.

The FCA took over regulation of all consumer credit from the Office of Fair Trading (OFT) on 1 April, 2014. These rules brought in;

  • Real affordability checks by lenders
  • Clear, fair advertisements and promotions.
  • Limit rollover limits to 2
  • Limits of continuous payment authorities (CPA) to 2
  • Mandatory requirement to offer debt advice to all rollover loan customers
  • Clear risk warnings
  • Dedicated supervision and enforcement of legislation

The FCA proposes new rules from January 2015;

  • Default fees capped at £15.
  • The overall cost of a payday loan cannot exceed 100% of the original loan.
  • Interest and fees cannot exceed 0.8% per day

The history of experience suggests that consumers who choose legitimate sources for their payday loans, will be better protected in the future. Nevertheless, for those who fail to qualify for an official payday loan (now under tighter regulation), they will potentially resort to the underground and underhand tactics of loan sharks who operate illegally and many without the necessary scruples or moral obligations.

Industry Statistics

There are no actual industry statistics that encompass specific details of every lender, their customers, and exact figures confirming how the marketplace operates. Here are some declared figures that demonstrate the prolific growth of the payday loan industry in the UK

A cursory glance across the Internet shows that during 2004, £100 million of cash advances were provided. This increased to around £2.2 billion between 2012 and 2013.

Approximately 66% of consumers using payday loans have an income of around £20,000 per annum.

Almost 10,000,000 UK residents are bordering on financial breakdown.

Wonga.com declared a profit of £84.5 million in 2012 after seeing a 68% increase in lending during 12 months and served 1 million customers.[5] 

National Debtline reported a dramatic increase in people seeking debt advice with call numbers up 100% during 2012 and increasing by 4200% since 2007. They receive 100 calls a day about payday loans which is equal to one every seven minutes.[6] 

Step Change Debt Charity assisted 30,762 people with payday loan debt problems during the first six months of 2013, which was a similar number that they helped over the entirety of 2012.

The same charity announced the average payday loan balance was around £1200 in 2011, £1657 in 2012 and increasing to £1665 in 2013.[7] 

They show that 18.5% of people who contact the charity, own a payday loan. 65% of their clients have a payday loan that exceeds 100% of the individual’s regular income.[8] 

How the Industry Works

Lenders offer their deals direct to the public through aggressive advertising and marketing campaigns. They also purchased leads from lead generation companies. Lenders also operate broker networks to generate their business. Where a broker is involved, the consumer may pay an upfront fee to the broker or it is passed on as an initial fee by the lender.

Many of the lenders and brokers operate from high street property, but the greatest growth in the payday loans industry has been through the Internet, where the operating costs for lenders and brokers is far lower, especially matching the upsurge in smart phones and tablet computers that enable consumers to complete an application from virtually anywhere in the UK.

The majority of lenders are able to raise capital across the finance markets, but this has become slightly difficult during 2014 as UK regulation has been increased. The expectation is that the number of lenders will reduce, but loans will be offered with “a fairer deal” directed to the consumer. On one hand, this worries the funders of the payday lenders because they believe the market size will decrease, but this is balanced by an expectation that the default rate should also reduce.

Who Owns Who

Five of the seven biggest payday lenders in the UK are either owned or controlled by an American business.

The Dollar Financial Group is the largest payday operator in the UK, branding as the Money Shop and Express Finance. During February 2011, they purchased PayDay UK, the largest Internet payday lender.

Wonga.com is one of the most well-known British payday loan companies. 77.1% of their 180 million shares are owned by venture capital companies. The remainder is owned by employees, board members and founders, with former chief executive Errol Damelin owning 26.5 million shares from an offshore trust in the British Virgin Islands. Jonty Hurwitz owns 12.6 million shares through a British Virgin Islands arrangement.

Cash Lady is owned by need completing. This business featured Kerry Katona in a widely criticised advertising campaign.[10] She was removed from advertising the business after being declared personally bankrupt for the second occasion, in 2013.

During August 2014, Canadian business Cash Store, saw its UK business collapse, losing 27 high-street shops and 120 employees. Advanced regulation may have caused the company to reassess whether the business could be profitable in the future, but individuals with a debt to Cash Store will not see the debt disappear as debt collectors SLL capital of Croydon have taken over the loan book.[11] 

Irresponsible practices

The media, charities, government departments and anyone with a dog appears to have an opinion about the irresponsible lending and debt collection practices that have been used by the payday loan industry in the past - and some of it may continue in the future.

A review by Citizens Advice[11] investigating 2000 payday loans from 130 lenders, found that 87% of the lenders didn’t ask the consumer to prove they could afford the loan, while 58% of the lenders didn’t inform the potential customer that a payday loan was not a long-term solution.

In the past, many claims by payday lenders have fallen foul of the Advertising Standards Authority (ASA)[12] who monitor all advertising and marketing in the UK.

While payday lenders may say that loans are for short-term purposes and should be cleared by the next payday, 50% of the industry’s revenue is generated by 28% of the loans that were rolled over or refinanced at least once.[13]

The culture within payday lenders has been to encourage rollovers, but recent 2014 legislation will change these ideals over time, if not immediately.

The methods used by some payday lenders to collect outstanding debts have bordered on oppressive to illegal, with severe pressure placed upon consumers to either repay the debt or roll it over into a further loan, without much opportunity or possibility of ever clearing the debt successfully.

Once individuals understand their rights and the law, they will be able to organise a new and effective repayment deal for the loan, which will eventually suit both parties.

 

refrences

[1] thesun.co.uk/sol/homepage/news/politics/4641129/Payday-loan-for-1-in-10.html
[2] wikipedia.org/wiki/Usury
[3] gov.uk/government/organisations/competition-and-markets-authority
[4] consumeraffairs.org.uk/loans/payday-loan/industry-report
[5] idealds.co.uk/latest-news/payday-loans-the-truth
[6] idealds.co.uk/latest-news/payday-loans-the-truth
[7] stepchange.org/Mediacentre/Pressreleases/Paydayloanproblemsworsen.aspx
[8] stepchange.org/Portals/0/Documents/media/reports/statisticsyearbooks/Statistical_Yearbook_2012.pdf
[9] wikipedia.org/wiki/Kerry_Katona
[10] independent.co.uk/news/business/news/payday-lender-cash-store-collapses-with-120-jobs-lost-9650196.html
[11] citizensadvice.org.uk
[12] asa.org.uk
[13] oft.gov.uk/shared_oft/Credit/oft1481.pdf

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Taking a Closer Look

The above articles should have helped give you a very clear overview of the payday loans sector as a whole. This section of the site has the goal of focusing on individual topics that relate to the industry and then in detail taking a critical look at them. We hope you find them revealing and informative.

US payday loans are a decade ahead of the UK in terms of legislation and proposals that affect the consumer of choice, but with further changes in UK law due in 2015, will the UK laws finally catch up and how are the UK authorities learning from the US experiences?

Across the pond, payday loans are legal in 27 of the 50 states. With restrictions, 9 states allow controlled short-term store-front lending, while 14 states and the District of Columbia have outlawed the practice completely by providing protection to ensure that small loan rates are capped at a reasonable level.

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