Payday lending has been the focus of intense scrutiny for some time now – with fierce criticism from politicians, consumer and debt charities and anti-poverty campaigners. These short-term, high-interest lenders are often styled as predatory companies targeting the most vulnerable in our society.
By return, the industry accuses its detractors of attacking a legitimate activity. Payday loans, they argue, meet consumer demand for fast, easily accessible cash to cover one-off expenses.
They point out that the loans are often cheaper than unauthorised overdrafts or a bounced direct debit and remind critics of research which suggests that most short-term borrowers report positive experiences.
In the UK, the growth of payday loans is a relatively new phenomenon, fuelled by a perfect storm of rising living costs, lower incomes and strict mainstream borrowing criteria.
Add in the speedy application and decision-making process, heavy advertising and the anonymity of online applications and the boom is easy to understand.At Citizens Advice Edinburgh, our volunteers see first-hand the human cost of the lenders’ success.
In our experience, attempts to clean up the industry have failed. Last November, 90 per cent of payday lenders signed up to a voluntary Good Practice Charter with its commitments on affordability assessment, credit vetting and transparency on the use of Continuing Payment Authorities (CPA’s) – the mechanism by which creditors can access your account and take payments. Yet all clients coming to us for advice and help with payday loan debts still have more than one loan. One recent client was juggling a staggering eight payday loans. His high-interest debt totalled more than two months’ salary.
Another borrower – who was just 19 years old – came to us with loans of more than £2,000 from three separate payday loan companies.
In part-time employment and earning the minimum wage, it was clear that affordability criteria had not been applied and she was not in a position to afford the loans. Yet she was receiving numerous calls and texts throughout the day chasing her for payment and – disturbingly – multiple offers of further credit.
These cases are by no means unusual and they are not isolated errors in an otherwise fair system. Almost all clients coming to us for advice have been encouraged to roll over their loans and/or take out additional high-cost credit.
This situation mirrors the year-long Office of Fair Trading review, which found that half of payday lenders’ revenue was generated by rolled-over loans.
Much of the criticism levelled at payday lending focuses on the astonishingly high interest rates. Contrary to popular opinion, however, most people who come to us for help do understand the high rates and they are acutely aware of the unmanageable costs of being unable to pay the loan back in three or four weeks.
The real issue is that extreme financial pressures and limited alternatives narrow the focus to the here and now.
When there is no credit on the electric meter, you are hungry and you do not have the bus fare to get to work the fact a £100 loan could cost £5,835 in 12 months doesn’t mean much.
This reality also creates little incentive for lenders to compete on cost – a situation now being investigated by the Competition Commission.
Both lenders and some critics of the industry argue that much tougher regulation will only create a vacuum for loan sharks and door-step lenders to fill. This concern – while warranted – ignores the opportunity to bring innovation and ethical alternatives to the short-term lending market.
The solution to any form of unsustainable credit is investment in genuine alternatives – Credit Unions, community-based lending schemes and the development of much lower cost, short-term credit facilities by the mainstream services.
In April next year, responsibility for consumer credit regulation will pass to the new Financial Conduct Authority (FCA).
The FCA has indicated that it will crack down on irresponsible payday lending practices. For those caught in the grip and misery of these high-risk, high-cost loans, this can’t come soon enough.
• Moira Tasker is chief executive of Citizens Advice Edinburgh www.citizensadviceedinburgh.org.uk. Citizens Advice Scotland is gathering further evidence from across the country on how payday lenders are treating their Scottish customers. The survey can be found at www.surveymonkey.com/s/ScotlandPDLs