Experts push for options to keep people away from loansharks, writes Jeff Salway
New rules aimed at protecting borrowers are set to force dozens of unscrupulous payday lenders out of business – but it is feared many people will then be left vulnerable to even riskier forms of credit.
Charities in Scotland have also warned that, while the changes will stamp out the worst practices in the payday loan market, there is a danger that some borrowers will now view payday loans as a “safe option”.
The City watchdog yesterday introduced a cap on the charges payday lenders can levy on borrowers, in the latest stage of its crackdown on the sector.
The measure limits fees and daily charges for interest to 0.8 per cent of the loan amount and default charges are capped at £15. Borrowers will never have to pay back more in fees and interest than the value of the loan, under a total cost cap of 100 per cent.
The cap is being imposed by the Financial Conduct Authority (FCA), which took over regulation of the credit sector last April. It has already introduced new rules forcing lenders to conduct detailed affordability checks on borrowers and signpost them to free debt advice, while borrowers are limited to two “rollover” loans.
The new ceiling still allows for interest rates of up to 292 per cent a year – and few lenders are going below the maximum – but the impact on the industry could be huge, experts say.
The “villains of recession Britain” face “annihilation”, according to Dr John Gathergood of the Nottingham School of Economics, with the cap and the impact of the previous measures set out by the FCA expected to leave just a handful of large lenders in the market.
Among them will be Wonga, despite the firm having to pay millions in compensation after sending “fake” legal letters to borrowers in default.
Analysis by the FCA concluded that the biggest lenders are unlikely to be affected by the cap because their charges are either below it already or they were going in that direction.
In 2014, an average of 880,000 UK households took out a payday loan each month, said consumer group Which?.
The biggest payday loan debts in the UK are in Scotland, figures from the Stepchange Debt Charity suggest. People who have sought help from the charity for help with payday loans have debts averaging £1,438 (£129 above the UK average), which in many cases exceeds the individual’s monthly income.
“Scotland has suffered more from the rise in payday loans than other parts of the UK,” said Mike O’Connor, chief executive of StepChange.
“New rules for payday loans are a welcome start to 2015. They will help address problems within the payday loan industry which have made bad situations worse for thousands of people.”
But he said while the cap will help prevent debts on short-term loans from spiralling out of control, more action is needed: “We want to see a mandatory real-time database for payday lenders to share information, limiting the risks of unaffordable multiple borrowing.”
There are fears that the shrinking of the market will leave desperate borrowers vulnerable to unregulated forms of credit, such as illegal money lenders. Around 70,000 people who have taken out payday loans in the past will no longer be able to do so because of the new rules, FCA research suggests.
O’Connor said: “We need to see more options and support for the thousands of financially vulnerable people for whom payday loans have become the credit of last resort.
“People will still need to borrow money in 2015 and policy makers and creditors must resolve to put an end to the very real dangers of problem debt.”
Citizens Advice Scotland (CAS) welcomed the latest changes, but warned that people should avoid falling into the trap of viewing payday loans as a “safe option” under the new rules.
Fraser Sutherland, policy officer at CAS, said: “What the cap does is limit the sort of debts people can get into, but it remains the case that payday lenders’ interest rates and charges are very high and our evidence shows many lenders continue to operate irresponsibly.”
He urged anyone who absolutely has to borrow to seek out the most affordable options, “which are usually credit unions, not payday lenders”.
He added: “Governments and local authorities also need to do more, not just to cut down on abuse in the industry but also to provide more affordable lending options for people in need.”