Important Steps Needed To Protect Payday Loan Users
There needs to be effective safeguards put into place now in order to avoid UK payday loan borrowers from experiencing the same detriment as those in the US, where it has been estimated that 5,000,000 consumers each year are caught in a ‘cycle of debt’, where they become dependent on repeat borrowing at high cost in order to meet their basic living expenses.
The impact of payday loans on those identified as having long-term negative experiences could be addressed by the Office of Fair Trading and the Consumer Protection and Market Authority (CPMA) requiring lenders to:
- Limit the number of repeat loans.
- Limit the value of repeat loans.
- Limit the number of months that a loan can be deferred or ‘rolled over’ for.
- Control the amount of money that consumers can borrow by ensuring that more thorough affordability checks are undertaken when the first loan is taken out (including effective salary checks).
- Ensure that these affordability checks are subsequently repeated when any additional loans are taken out in order to check for any change of circumstances.
- Share the information in order to avoid people being able to take out payday loans from multiple lenders simultaneously.
What are Payday Loans?
As the name suggests, Payday loans are small cash loans that are provided for short periods of time, which is usually until the borrower’s next pay date.
These types of loans are sold both online and on the high street, with typical costs from paydayloans.org.uk ranging from £12.00 per £100 borrowed on the high street, right through to £34.14 per £100 for loans applied for online.
High street premises that offer these types of loans will usually involve the customer receiving the cash in person, and often repaying the loan with a post-dated cheque when the loan is taken out. With an online application, the money is transferred electronically to the customer’s bank account once the loan has been approved, with the subsequent repayment also taken electronically either from the customer’s debit card or via direct debit at an agreed date. Both high street and online payday loan lenders require customers to have their own use of a bank account for the purpose of loan repayment.
Due to the short term nature of these types of loans, the Annual Percentage Rates (APRs) are extremely high and range from 334% right up to 4,400% in some cases. However, although these rates of interest do look exceptionally high, the use of APR calculations for very short term loans has been criticised for exaggerating the cost of borrowing when compared to other forms of credit. For example, the charges associated with using unauthorised bank overdrafts where the costs and fees involved are not required to be calculated as an APR percentage.
Regardless, the cost of using payday loans is still high when compared with authorised overdraft credit, and to small sum credit card borrowing, where the amount is cleared with three months of borrowing. In addition, the costs involved with borrowing from payday lenders can increase dramatically if the borrower chooses to defer their loan repayments past the original repayment date.
Many payday lenders allow their loans to be deferred or ‘rolled over’ beyond the originally agreed repayment date provided that the borrower subsequently pays another month’s fees and associated charges. The ways in which these roll over loans are handled tends to vary greatly from one payday loan provider to the other, with the best practice operators limiting the amount of roll overs allowed for each customer. However, there are some lenders who place no limits on the number of times a loan can be rolled over, which itself significantly lengthens the repayment period and greatly increases the overall cost of the loan.
5 Loans Per Household Limit
By limiting the number of loans or rollovers to a maximum of 5 per customer, payday lending should still be available for consumers to use them, but not to the stage where they are becoming an unsustainable debt.
The aim of putting a cap on the number of loans or rollovers allowed would be to prevent consumers getting themselves into a debt spiral where they reach a point where they are borrowing in order to service the loan which is now increasing rather than relieving their burden of indebtedness.
NO Specific Payday Regulation
Right now there is no specific payday regulation in the UK, payday lending is currently regulated by general consumer credit legislation that is just not adequate.
Banning Payday Lending In UK
We feel that further work needs to be carried out by the Office of Fair Trading to investigate the impact of banning payday loans within the context of the UK market.
To date, research in this area has been largely focused on the experiences of other countries and is not specific to the UK payday lending market.
Currently, it is a concern that imposing a complete ban on payday loans in the UK would increase illegal lending, but if a greater range of lower cost alternatives were to be made available to low income customers through areas such as banks and social lenders, this risk would be significantly diminished!
UK Debt Counselling Services
Below you will find links to a number of non-proft debt counselling services in the UK.
These organisations will provide you with the advice and help you need, from someone paid tohelp you, not to make money out of you.