Questions and Answers on Payday loans
How do payday loans work?
Typically someone will borrow a few hundred pounds from a payday loan firm for a short time, to tide them over until they receive their next wage or salary cheque. The borrower will usually offer a post-dated cheque to the lender to cover the eventual repayment of the money borrowed, plus interest. The cash is often emergency borrowing to pay an urgent unexpected bill, or rent or utility bills.
How many people use them?
There are no official figures on how many people use this sort of borrowing. But Consumer Focus estimated last year that 1.2 million people took out 4.1 million loans in 2009.
Who uses them?
The OFT found that the typical borrower of a payday loan was “more likely to be a young male, earning more than £1,000 monthly, and in rented accommodation. Many are unmarried with no children”. But the borrowers are not normally unemployed or without a bank account. They sometimes see the short-term loan as a sensible alternative to running up an unauthorised bank overdraft.
How many firms offer them?
The OFT said in November 2012 that there were about 240 payday loan firms altogether in the UK, with the top 50 accounting for most of the lending.
Its previous research suggested there were about 2,000 High Street payday loan shops, some of which are part of large national chains, such as The Money Shop. Some were also pawnbrokers as well, operating out of the same premises. There were also thought to be more than 100 online firms offering cash too, which were much more expensive.
Are they regulated?
Yes. Any lender, whether it be a big High Street bank or a one-outlet payday loan shop needs a consumer credit licence from the Office of Fair Trading (OFT).
What is the problem?
The loans are very expensive with very high rates of interest. But in the eyes of the borrower that is often not relevant. What matters is the cash cost of repaying the loan. That can be acceptable to the borrower if the payday loan is more convenient than an overdraft, or some other sort of arranged loan, and is taken for just a few days. The problem for a borrower starts to build up quickly if they cannot in fact repay the loan as planned, and it gets extended, or rolled over. The interest then builds up rapidly and can soon swamp the size of the original loan.
Should anything be done?
Despite the negative publicity surrounding payday loan firms, the OFT said in 2010 that these and other high-cost credit businesses – such as pawn brokers or home-credit lenders – should not have their interest charges restricted. It concluded that they provided a useful service for some people who would not otherwise be able to borrow legitimately and who might thus be forced to borrow from illegal loan sharks.
But it changed its mind in its November 2012 report specifically on payday lenders. It referred the industry to the Competition Commission and has told individual lenders to improve how they deal with customers. The Consumer Finance Association, a trade body representing some payday lenders, says some of the biggest firms have signed up to a code of conduct.
However, the government has proposed going further with a cap on payday loan interest rates and charges. The regulator, the Financial Conduct Authority, will make recommendations on how this should work. Previously the government had said such a cap was not needed. Do you take out Payday loans? Do you agree with a cap on Payday lending?
[Adapted from a BBC Business report on payday lending]