Payday Loans in the UK

Payday Loans in the UK

Payday loans in the United Kingdom are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006—in 2009, 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion. The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective annual percentage rate (APR). According to Consumer Focus, “the cost of obtaining a loan online (often £25-£30 [per month] per £100) exceeds the costs of obtaining a loan on the High Street (often £13-£18 per £100)” because the lenders reject fewer applicants and face higher rates of fraud and default.

In 2009, the payday loan industry generated around £242m in revenue – around 20% of the total lending. The largest lender is Dollar Financial Group (which includes The Money Shop and Express Finance), which provided around a quarter of all payday loans in 2009. In February 2011 Dollar Financial additionally acquired the largest British internet payday lender, PayDay UK, and suggested The Money Shop’s network could grow from around 350 shops to around 1200.

Overview
Payday loans originated in the United States and have been growing quickly in the UK market over the last five years.[when?] They offer a relatively small amount of capital (usually up to £500) for a short term, often under two weeks on average (or until “payday”). The providers charge a fee for the loan usually expressed as a flat fee per £100 borrowed for the stated short period, usually around £25.

The number of people taking out payday loans in the UK in recent years has increased fourfold, to 1.2 million in 2009[out of date information]. Borrowers took out around 4.1 million loans amounting to £1.2 billion in money lent. Payday loan borrowers are taking out an average of 3.5 loans a year and the average size of a payday loan in 2009 was an estimated £294. 67% borrowers had incomes below £25,000.

A typical payday loan could cost as much as £25 for every £100 borrowed per month, meaning a £300 loan would cost £375 to repay after one month. Since there are no legal limits on rolling over loans in the UK, if the loan was rolled over for six months it could cost as much as £660[£896 if the rate of interest stays the same] to repay the loan in full. There are no restrictions on the interest rates payday loan companies can charge: one UK company offers a “typical APR” of 1355%, allowing for compounding. Another lender advertises an annual rate of 2,225%. Most companies charge 25% for an advance repayable at the end of the month, which explains the high rate; a few charge 30%, which is equivalent to an APR of over 2000%. If you keep failing to repay your payday loan, this enormous APR could become a reality in a few months. There is serious doubt as to whether the borrowers understand this and as to whether the lenders could in practice collect such large amounts of interest.

Regulation
Under the Consumer Credit Act 1974 lenders must have a licence from the UK Office of Fair Trading (OFT) to offer consumer credit. The Consumer Credit Act 2006 explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence. There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. This means that the “typical APR” must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted. Advertising is regulated by the Advertising Standards Authority (ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.

In June 2010 the OFT published a “review of high-cost credit.” In this report they concluded that changes could be made to the industry itself, but that “more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.”

To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report – “We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area.”

In March 2013 the OFT published a long awaited update regarding the industry. It was very critical, giving the 50 leading lenders just 60 days to address the issues raised or risk losing their licences. In particular, it cited “a failure to work out whether people could afford the loans, aggressive debt collection practices, a failure to explain how repayments are collected, and a lack of sufficient forbearance for those who cannot afford the repayments.” It referred the market to the Competition Commission for “deep-rooted problems in how payday loan companies compete” With the newly created agency, the Financial Conduct Authority, due to take over the regulation of the industry from the FSA in 2014, the government expects greater control and powers over rogue lenders. Critics of the industry, including Which? and debt charities, welcomed the developments. Russell Hamblin-Boone of the Consumer Finance Association, a trade body that represents 70% of the payday lending market, dismissed the criticisms. He said the OFT’s report was based on findings in summer 2012, when they visited the companies in question, and in the months between the research and the publication of their findings, the industry had done much to improve its practices. He expects all his members will satisfy the OFT within the 60-day period and retain their licences, and he further claimed that he does not believe the whole market is set up to profit on defaulters.

Brokers
As payday loan companies can achieve large profits from these loans, they employ large broker networks to generate business. These are sometimes termed a loanfinder service, and can include a broker fee, which is often payable upfront; meaning the applicant must pay a fee merely to apply for an advertised loan, in addition to the high rate of interest. The OFT has urged the government to tighten restrictions on payday loans. There are now brokers that help applicants avoid paying these extra fees when applying for payday loans in the UK.

Criticism
There has been considerable criticism of the short-term loans market in the UK. Vince Cable MP said in 2008 that “the growing popularity of these kinds of short-term loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK.” Chris Tapp of debt charity Credit Action said in mid-2008: “Over the past year, payday loans have become an issue in the UK, and the growth in people who have such a loan and have problems has been notable in the last six months.”

Credit Action made a complaint to the OFT that payday lenders were placing advertisements on social network website Facebook which broke advertising regulations. Its main complaint was that the APR was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards.

In 2010 a campaign organised by pressure group Compass to “end legal loan sharking” and apply interest rate caps in the “high cost credit sector” saw over 100 MPs sign an Early Day Motion in September 2010, and over 200 by April 2011. Other motions on the subject have been made in previous years, and groups such as Debt on our Doorstep have previously highlighted the issue.
The writer Carl Packman has criticised the regulation of the industry. Packman says: “given the regulatory landscape currently in force we have to trust on their word that they follow a self-defeating business model … Indeed payday lenders break their promise on responsible lending all the time.”

The most widely criticized payday lender is undoubtedly Wonga.com, one of the biggest finance firms in Britain. But Wonga has faced widespread criticism over its interest rates, allegedly heavy-handed debt collection methods and its £24 million shirt sponsorship deal with Newcastle United football club that some say will tempt impressionable young fans to get into debt. Another concern over evidence it has allowed children to borrow cash. Although under-18s are banned from taking out loans with the firm, young people are finding ways to convince Wonga’s “automated, real-time risk and decision system” that they are eligible for its 4,214 per cent APR loans.

Wonga.com has grown rapidly and is reported to have advanced loans to in excess of 1 million Britons. As highlighted by the BBC’s Watchdog Programme, the Daily Mail[28] and many others,[29] the company has recently become the target of identity thieves, with hundreds of cases of UK individuals being chased by the company for repayment of loans they have never applied for.
Further scrutiny has come from the use of celebrity endorsements. Kerry Katona was involved with the payday broker Cash Lady which led to her being widely criticized, especially when the advert referred to her previous financial difficulties. Following complaints to the ASA in May 2013, Cash Lady adverts were re-edited to remove the phrase ‘Fast Cash for Fast Lives’. The ASA believed this implied that payday loans would help fund a high-flying celebrity lifestyle.

In July 2013, Katona declared bankruptcy for the second time, and was dropped by Cash Lady. This happened the month before a further ASA ruling said they would no longer be able to use Katona in their adverts, as she was too heavily associated in people’s minds with debt.

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