How to fight the payday loan sharks
In this post, Carl Packman explains the rise and rise of payday loans and how the problem of loan sharks can be challenged.
With the Wonga sponsorship deal of Newcastle United Football Club and David Cameron's former aide, Jonathan Luff, going to work for the controversial lender, payday loans are once again at the top of the news.
But, actually, it is almost a constant presence in our news, enjoying almost universal scorn by the press and politicians alike. Indeed, it is indicative of the scale of the problem that with no one speaking out for the industry, it still manages to grow and grow, making its top staff very successful indeed.
But where are we with the legal loan sharks in the UK today?
Where we are
The payday lending industry is said to be worth, overall in the UK, between £2-4 billion, a rise from £100 million in 2004.
Joanna Elson, the chief executive of the Money Advice Trust, noted at the start of the year that: "Just two years ago, National Debtline was receiving around 150 calls per
month from people with payday loans – that figure has now ballooned to 1,100.”
As a type of consumer credit, payday loans are regulated by the Consumer Credit Act 1974. Legislation is currently enforced by the Office for Fair Trading (OFT) but that will change when powers are given to the new Financial Conduct Authority (FCA) in 2013.
Athough consumer credit regulation says that no unsecured loan should exceed £25,000, there is no mechanism to control how much a lender can charge or the rates of interest it sets – which has meant that payday lenders can charge very high amounts.
In 2010, the OFT’s guidance for creditors on irresponsible lending pointed out that:
“All assessments of affordability should involve a consideration of the potential for the credit commitment to adversely impact on the borrower’s financial situation, taking account of information that the creditor is aware of at the time the credit is granted.”
However the OFT, who have the powers to revoke credit licenses, have admitted that it hasn't got the capacity to check this for every payday lending shop or internet branch. What it has recently sought is the powers to shut down payday lenders quickly and easily, if they are found in breach of regulations, but only time will tell how success this is.
What we want
Obviously, the system we have at the moment does not fully work. In principle, it is good that the OFT has the regulations it does, and with enough will, its consumer credit department will have the capacity to be tough on wrongdoing firms.
What we need, though, is more regulation.
One of the interventions that is most talked about is an interest rate cap.
However - the problem with such a cap is that how much interest a lender can charge is only one problem. The annualised percentage rating (APR) of many payday loans can be as high as 4,000+ per cent, but we ought to be clear that this is reflective of a loan that is taken out for a year.
As many payday lenders rightly argue, their loans are never taken out for a year, and so the APR actually distorts the real cost of a loan. This is not to say, though, that payday loans are not expensive. Compared with, say, authorised overdrafts from a bank, they are extremely costly.
Research by R3 has shown that 60 per cent of people who took out a payday loan have regretted the decision afterwards – because they are so detrimental to a person's finances.
So for this reason, instead of an interest rate cap (which can also be easily avoided by companies, who can recoup their loss by charging more for administrative fees, for example), I call for a cap on the total cost of credit. This would mean that there was a limit to how much a lender can charge for a loan (as well as added fees) and stop excessive profits being made on the back of people who struggle to get to the end of the month.
The government have a lot of work to do on the reasons many people can't afford to get to the end of the month also. Most payday loans are being taken out to buy food or bills and this should give the current administration pause. But we shouldn't just wait on the state alone (particularly not a Tory-led one). There are things we can be doing ourselves, right now.
What we can do
− Join a credit union, from which you can save and borrow money at a comparatively low cost
− Write to councillors. Lewisham Council, in London, recently passed a motion calling for an end to “legal loan sharks” through its pledge of promoting credit unions in the borough and other community-based organisations that offer access to affordable credit and promote savings
− Write to Members of Parliament reminding them that the issue is live, something that their constituents are concerned about and that any pressure they can put on the government in parliament would be a boon for local communities
− Write to local payday lending shops demanding, as concerned citizens, that they commit to giving debt advice to the people they sell loans to and that it provides information on cheaper alternatives in the area
− Join existing campaigns to end legal loan sharks such as the one organised by Movement for Change.
Carl Packman is the author of the book Loan Sharks: The Rise and Rise of the Payday Lenders which was published by Searching Finance in October.
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