The criticism of payday lenders is fierce. They are accused of leaving borrowers without money to buy food or pay bills, targeting the vulnerable and wrecking communities. The lenders say they meet a need and provide an alternative form of short-term credit. Who is right?
With the news that two more lenders were shut by the Office of Fair Trading last week, The Mail on Sunday investigates the world of payday lending and talks to those with personal experience of this boom industry.
Convenience: Payday lenders offer short-term loans via websites and high street shops, with money paid quickly
THE COST
Payday lenders offer short-term loans via websites and shops on the high street, with money paid quickly into borrowers’ accounts.
The annual percentage rates (APR) appear huge. For example, Toothfairy Finance, which brands itself as ‘fast and cheap’, levies an APR of 5,240 per cent. Txtloan and Wonga have APRs of 4,474 per cent and 4,214 per cent respectively.
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'Wonga offered me a payday loan of more than my monthly salary'
Costs are less dramatic when loans are paid back on time. For example, £300 from Wonga repaid after 30 days will cost £95.89 in interest and charges. Lenders rely on this as their defence, saying small sums are only meant to be borrowed over a short period. But loans often represent a high proportion of borrowers’ monthly income, making it difficult to repay them quickly. After the initial term ends, a ‘rollover loan’ or a late collection fee is a likely outcome.
The Office of Fair Trading, which is investigating the sector, found a third of payday loans are not repaid on time. It calculated half of payday lenders’ revenues come from unpaid loans rolled over into new ones. Despite these concerns, customers are borrowing more, with total loans doubling since 2008 to £2billion per year.
DEALS: Payday loans are often attractive to people on low incomes, such as pensioners and students
REGULATION
Payday lenders must hold a licence with the OFT and clearly state their APR in advertising.
Other countries, such as Germany and France, have gone further and applied a cap on rates. Campaigners say that by taking a softer line, UK regulators have allowed borrowers here to become ‘easy targets’.
Kathryn Perera, chief executive of activist group Movement for Change, which is campaigning for access to fairly priced credit, says: ‘Many of the lenders are backed by companies from overseas. In the US, the introduction of tighter regulation led many companies to seek easier markets – and they found one in the UK.’
Poor compliance with the rules that are in place is ‘endemic’, according to the OFT. It has found widespread evidence of lenders failing to check customers’ ability to afford initial loans. It also says lenders are prone to ‘roll over’ unpaid loans into new, costlier deals while there is evidence of aggressive debt collection.
HOW THE COSTS STACK UP
1. £300 borrowed over a month might typically cost £90 if a loan is repaid on time after 30 days.
2. If interest is paid but not the capital, the borrower still owes £300. A new loan sees another £90 interest added for a second month.
3. After 60 days if another £90 interest is paid but nothing else, another month’s interest is added, meaning £390 is still owed but the borrower has already repaid £180.
4. If the loan is rolled over again but then repaid after 120 days, borrower pays £660 – more than twice the original loan amount – not including any additional penalties the lender might apply for late repayment.
Gillian Guy, chief executive of Citizens Advice, says: ‘The behaviour of some payday lenders is appalling. People have been left without money to buy food or pay bills after lenders drained their bank accounts because they missed a payment.’
Critics allege that lenders don’t disqualify applicants with loans elsewhere, meaning multiple loans can be taken out with several lenders. Step Change – the new name for the free Consumer Credit Counselling Service – recently reported helping a couple with 36 payday loans between them.
The charity has seen a 45 per cent jump in the size of their clients’ average payday loan debt to £1,657.
New clampdowns are expected. From next April, the new Financial Conduct Authority will be responsible for regulating lenders and is considering tougher advertising restrictions, a new code of practice and a cap on interest rates.
Meanwhile, the OFT has already revoked the licences of three payday lenders. MCO Capital was closed last month for failing to check applicants’ identities and giving fraudsters free rein. Cheque-cashing businesses B2B International UK and Loansdirect2u, which both also offered payday loans, were shut last week after it was discovered Neil Evans, an associate of both Brighton-based companies, had been convicted for violence and fraud.
However, Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents about 70 per cent of payday lenders, says: ‘Since the OFT’s investigation in 2012, we have introduced a range of new customer safeguards.
‘These include robust affordability assessments; limiting the number of times a loan can be rolled over; making all costs clear in pounds and pence; and help for customers who get into difficulty by freezing interest and charges, arranging repayment plans and directing them to free debt advice.’
WHO USES PAYDAY LENDERS?
Lenders claim their credit is a lifeline for those who have no other access to short-term cash.
For example, it could be someone who needs a few hundred pounds immediately to fix their car so they can get to work again but they have no overdraft facility.
The borrower would then repay the loan and everyone would be happy. Critics of lenders say that many borrowers are in far worse positions: the jobless, ill, financially naive or simply desperate.
Cancer charity Macmillan says it has anecdotal evidence of patients turning to short-term loans as a consequence of their illness. It will be researching this further.
There is also criticism that payday lenders advance cash to those with low or no incomes, such a pensioners or students.
Earlier this year, targeted marketing at students prompted the University of East London to ban payday lenders from advertising anywhere on its campus.
IN ONE MILE, SIX LOAN FIRMS ON THE HUNT FOR HARD-UP CLIENTS
They are a familiar sight on the high street – betting shops, pawnbrokers and payday lenders that have sprung up as quickly as post offices, banks and pubs closed.
In Kilburn High Road, North-West London, there has been an influx of ‘fast cash’ shops: 13 along the busy street – and six within only one mile.
But a campaign has been mounted to keep out some of these businesses, led by activist group Movement for Change and its spin-off, the Kilburn Fair Credit Commission.
TAKEOVER: There has been an influx of 'fast cash' shops on London's Kilburn High Road
The Mail on Sunday has reported how other communities have succeeded in restricting the spread of betting shops. At a meeting this month, Kilburn residents voiced their concerns to Shadow Business Minister Lord Mitchell.
Ajay Kumble, 47, chairman of Kingsgate Neighbourhood Watch, says: ‘A lack of proper financial advice has led to payday loan companies doing brisk business and taking over the street.’
Kathryn Perera, head of Movement for Change, says: ‘The impact is profound in many communities, not just in terms of the look of the high street, but how people feel about their neighbourhood.’