A new report has called payday lending the most harmful type of debt that an individual can obtain.
Representatives of UK payday lending, an industry that has grown from being worth around £900m in 2009 to £2.8bn today, will always say that their product is a responsible one. Russell Hamblin-Boone, chief executive of the largest payday lender trade association, the Consumer Finance Association, told the press in 2012 that using such loans as a one-off can prevent “a one-off financial difficulty from becoming a wider financial crisis”.
But Hamblin-Boone, either wilfully or in full knowledge of what he is doing, misunderstands the real criticism of his industry’s business model: that it too frequently locks people in a debt spiral to maintain their regular custom – a practice that brings with it huge financial rewards for the industry.
Rollover loans are where a borrower continues paying off a loan after the set repayment date and over the years lenders have been accused of encouraging them. Research last year by the Office of Fair Trading found that around 50 per cent of a lender’s profit comes from rollover loans and the Competition Commission, earlier this year, found that around 35 per cent of loans were not paid back on time.
Currently there is no limit on the amount of times a loan can be rolled over; nor a set limit on how many loans can be taken out at one time, or even a facility that can estimate how many loans an individual has live at any one time.
To give you a feeling for how this might look in real life, one individual who was seeking debt advice owed three companies money: the sum of £625 plus £162.50 in interest to QuickQuid; £200 plus £34 in interest to TxtLoan; and £225 plus £63 interest to Speed-e-Loan.
This person had also within six months defaulted on a loan from Wonga. They were seeking advice because the next day repayments for two of the loans were due, and they could not repay.
That person’s desperate situation meant they would have to find money to pay the principle loan and even more money for interest, possibly also fines. And this is no peculiar story in the payday lending industry.
It is for this reason, and others, that a new report by Demos called The Borrowers, out today, has called payday lending the most harmful type of debt, excepting illegal loans, that an individual can obtain.
The report’s Harm Index combines the financial, emotional and social consequences of taking on a particular credit product, assessed from polling data of 1,775 adults, finding that payday loans had the greatest negative impact.
The Financial Conduct Authority, who take over from the Office of Fair Trading on the 1 April regulating consumer credit, including payday lending, have set out their rules on how they intend to regulate this sector. While it is encouraging to see a focus on enforcing existing regulation, as well as tightening up others, the rules do not go far enough to fix the problems we have seen in the industry.
The FCA will only limit the number of rollovers to two, which because just one rollover is a sign of struggle will have minor effect on consumers, while there is to be yet further consultation on whether to introduce a mandatory real time database to log all loans a person takes from a payday lender.
With these changes, instances with individuals like the one above will still occur. What’s needed is something closer to the regulatory system in Australia where the costs of credit are capped, there’s a limit in a 90 day period on how many loans can be taken out to two, refinanced and rolled over loans are prohibited and legal penalties on lenders can result in six or seven digit fines, as well as a possible jail term.
Until such time the harm created by lenders will continue.
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