People struggling on payday loans has risen by 42 per cent in the last year - the industry still needs to be reformed
People struggling on payday loans has risen by 42 per cent in the last year – the industry still needs to be reformed
After scandals relating to adverts on children’s TV, selling loans to people who have mental health difficulties, people too young to take out loans, people who cannot afford to pay back and competing on how fast they can sell loans rather than on price, you would think by now the payday lending industry as a whole would have changed. News today reveals otherwise.
According to debt charity StepChange the number of people struggling with such a loan has increased by 42 per cent in the last year – which means that all the time the industry has faced increased political scrutiny they have still acted unscrupulously and immorally.
Subject to investigation upon investigation, from looking at the way in which the industry operates as a whole by the Office of Fair Trading in 2012, to assessing how competitive it is from the Competition and Markets Authority, nothing seems to stop payday lenders targeting the most financially vulnerable, from whom they make the most money.
StepChange in Q1 and Q2 of 2014 dealt with 43,716 consumers who were in trouble via payday loans compared with 30,762 in the same period last year.
As a result they have called for a cap on the cost of credit to be set at £12 per every £100 lent, to mirror maximum default charges of credit cards.
The rate of £12 is also the figure worked out as the fairest for a loan of £100 from a short term lender. While assessing break-even rates for payday lenders back in 2013, the London Mutual Credit Union – whose CUOK product is a credit loan that matches lenders on speed but is sold at a fraction of the price, with the added benefit of a credit union such as savings accounts, member co-ownership, and debt advice – found that the cost to make a loan of £100 was around £8.
Given that default rates on a payday loan are at around 14 per cent the mark-up gives lenders the opportunity to price their loans to reflect the risk of borrowers not paying back.
But currently the cap on the cost of credit set by the regulator the FCA, according to their last consultation document, is £24. This means that as of January 2015 it will be set at around £6 less expensive than many payday loans on the high street.
While this is a start, and will see some lenders drop out the market (as should be the case if they cannot operate on a business model other than one that traps financially hard-up people in debt), there is still some way to go.
The consultation is ongoing on price, but a growing consensus by charities, individuals, and researchers is that a price cap of £12 proves a better deal for consumers.
Further, scrutiny of the payday lending industry as a whole clearly is not effective enough if still, at this time of greater consciousness about their practices, organisations like StepChange are still recording significant wrongdoing.
This is an issue not going anywhere, but critics of the industry need to be the eyes and ears because at the moment regulation is not picking up the pace.
Carl Packman is a contributing editor to Left Foot Forward
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