Jeff Salway: Big banks partly to blame for payday lending

It’s easy enough. After all, who can you upset by calling for a clampdown on payday lenders?. But it’s not good enough. We know they’re a blight on society, but how do we tackle them?

The scale of the problem is underlined by the report in this section on the dramatic rise in payday loan arrears among debtors in Scotland. Earlier this week, we heard Citizens Advice describe the payday lending industry as being “out of control”. Its latest report suggested the Office of Fair Trading’s threat in March to shut down unscrupulous lenders has had little effect.

Cue politicians earning brownie points and pledging on Twitter, with Cameron-esque bluster, to do something about it. What exactly are they proposing? Unfortunately they’re rarely willing – with honourable exceptions such as Labour MP Stella Creasy and Lothian MSP Kezia Dugdale – to offer suggestions.

Payday lenders are popping up all over the place and disappearing almost as quickly, only to re-emerge in a different guise. The regulatory system is several steps behind.

It doesn’t help that we’re in something of a limbo period until the Financial Conduct Authority assumes responsibility for payday lenders next April, at which point it may consider a cap on interest rates.

But the problem extends beyond the activities of payday lenders. Calling for them to be shut down entirely is not only pointless, but also detracts from the need to tackle the root causes of their success.

Most obvious is the growing demand from those struggling with financial difficulties. Why are they going to payday lenders? Because they have little alternative, credit unions and a tiny handful of sub-prime lenders aside; the banks have turned their back on them.

That’s logical from the point of view of responsible lending, but it also flies in the face of their social responsibilities, as Citizens Advice pointed out.

Scottish credit unions such as Glasgow, Scotwest and Capital offer short-term, easy access loans designed to deter their members from going to payday lenders when they’re in trouble. The rates aren’t cheap – usually 26.8 per cent APR – yet they’re far lower than on payday loans.

So why aren’t the banks offering basic short-term loans? There’s demand, and with the correct procedures they can be an additional source of revenue without piling on bad debts. Credit unions aren’t doling them out to people who can’t afford them, and they’re only available to members.

By freezing out so many people in debt and financial hardship, even if they’ve been guilty of the kind of irresponsible practices that got HBOS and company into trouble, the banks have helped create the payday lending phenomenon. They must also be part of the solution. You won’t hear many politicians suggesting as much though.

A PRICE war is being waged in the mortgage market that in theory could slash repayments for borrowers who take advantage. In practice, however, it’s not that straightforward.

Tesco Bank this week became the latest lender to cut its rates for those with deposits of at least 40 per cent, lowering its two-year fixed rate mortgage to 1.74 per cent and its five-year deal to just 2.49 per cent.

Yet it pays to look at the small print if you decide to snap up such cheap mortgages. Those new deals from Tesco come with charges of almost £1,500, including arrangement fees of £1,300. For some borrowers that will wipe out the savings made in switching.

This isn’t an isolated example. The number of mortgages available has risen by more than a third over the past year, while the cost of the average two-year fix has plunged from 4.21 to 3.28 per cent over the same period, according to Moneysupermarket.

But one reason lenders have been able to lower their headline rates to that extent is that they’re offsetting the costs with higher fees.

Total fees on the average two-year fixed rate mortgage have jumped from £1,170 to almost £1,400 since April 2012, Moneysupermarket found.

Even on five-year deals the average fee is up by almost a fifth, to £1,218.

The message is clear: don’t be seduced by headline rates. Lenders have made it increasingly difficult for borrowers to work out the total cost of a mortgage, not only by raising fees but widening the range of different charges levied.

They’re profiting from apathy and ignorance, as in so many products and services, because they know that many borrowers will fail to see beyond the cheap rate. It’s a good time to shop around for cheap mortgages, especially if your savings aren’t keeping pace with inflation. But you could end up worse off if you overlook the small print.