Householders are still relying on the most expensive types of loan, new figures suggest.
Householders are still relying on the most expensive types of loan, new figures suggest
There is no indication that the consumer debt crisis is easing. Figures published today show that at the end of April 2014, outstanding consumer credit lending stood at £160.2 billion – up from £156.1 billion at the end of April 2013.
To make matters even worse, the types of credit households are taking out are the most expensive, often in the form of payday loans. Those who can least afford it are paying the most for their credit.
The Competition and Markets Authority has today published details that say payday loans borrowers are being punished in their pockets because of a lack of competition in the market – to the tune of £45m per year.
What this means is that, because the industry competes on speed (‘We can get money in your account in 15 minutes’) rather than on price, the regulator has found that between £5 and £10 is added to the price.
This hurts borrowers in two ways: firstly given that lenders compete on speed, much less time is taken to assess a person’s outgoings during the underwriting process, which risks lending to someone who will find it difficult to make repayments.
Secondly, it means that even if a person is able to take out a loan and pay back on time they are paying a starkly high price for it.
A recent report by Sarah Beddows and Mick McAteer found that the payday lending market was, as far as competition is concerned, broken. In fact they compared it with a break in the US subprime mortgage market which found that, even with a large presence of credit, providers contributed to more problems for consumers than they solved.
With extremely close parallels to the state of UK payday lending, the Federal Reserve in 2007 pointed out that:
“Intense competition for subprime mortgage business … led to a weakening of (underwriting) standards. In sum, some misalignment of incentives, together with a highly competitive lending environment … likely compromised the quality of underwriting.”
Credit unions have in recent times been suggested as an alternative to payday loans, not least by the Archbishop of Canterbury.
Research carried out by the London Mutual Credit Union last year found that if the 7.4m – 8.2m payday loans estimated to have been taken out in 2011/12 from high cost lenders had been through a credit union (benchmarking their relative prices), between £676m and £749m would have been saved – the equivalent of an average saving of at least £91.43 for every payday loan.
Today is no day to celebrate, unfortunately. The number of people in hock to predatory payday lenders has risen massively in the last few years, during the recession and before it.
Time and time again we see that the payday loans market is broken. If prices are stuck and borrowers are being ripped off then this is where the state should step in. Setting a price cap on the cost of credit to a figure that will correct the break in this market is the right first step for the regulator to take.
Carl Packman is a contributing editor to Left Foot Forward
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