Alternatives to payday lending need banks’ support
Faisel Rahman, The Guardian
A recent report on payday lending was released on the same day that Blackpool FC, sponsored by payday lender Wonga.com, topped the Premier League – an irony not lost on those who have watched this sector’s growth.
Payday lending is a small loan (£100-£1,000) advanced until your next payday (usually a month). Charges are fixed as a fee per £100, and loans can generally be extended each month by paying this fee, or can be repaid in full. Users of the service in the UK tend to be earning less than £25k and more than half are under the age of 35.
According to Consumer Focus, which commissioned the report, the number of people using payday loans has quadrupled in the last four years to 1.2 million, with £1bn lent in 2009 alone by around seven major companies. It noted average APRs of 2,500%. If a £100 loan at this rate lasted a year, the annualised cost would be more than £400, on top of the £100 borrowed, but the loan is generally expected to be repaid within a month or two, which might mean a cost of £35 for a 30-day loan.
Fair Finance clients who have relied on payday loans in the past seemed to do so to cover an unexpected bill when they had reached their existing credit or overdraft limit. Although expensive, it is cheaper than a bounced direct debit charge or an unauthorised overdraft fee.
The report reveals that many people find payday loans convenient, with fund transfer almost instantaneous. Users report that they are happy to find a solution to their short-term credit needs that doesn’t involve banks, and can be done without recourse to family and friends.
The report suggests that data from the US finds that access to payday finance helps people to manage short-term credit flows and can stave off financial crisis. It also suggests that banning the service or imposing rate caps in two US states had resulted in more complaints about debt problems and higher rates of bankruptcies.
While the report rightly points out that payday lending has a high cost, it also notes that most clients are repeat borrowers. Payday lenders rarely make much profit from their first loan; the business is driven by repeat clients.
People who use payday loans as a one-off or repay a loan within a month generally have positive experiences of the service. But those who roll over – or extend – the loan, rapidly find the costs spiralling and becoming potentially unsustainable. Most often, it is low-income users who roll over their loans, or end up taking multiple loans. In the US, evidence has shown that people who take more than 10 payday loans or rollovers in a year (the equivalent of five in the UK due to longer loan terms) are in serious financial difficulty.
The report makes recommendations to better protect users. It suggests limiting the number of loans or rollovers to five per household per year, limiting the number of months a loan can be deferred for, limiting the value of repeat loans, encouraging data sharing between lenders and introducing affordability checks. These are all sensible options that have so far received limited response from the industry.
There is growing evidence in the US of partnerships between banks and non-profit lenders reducing people’s dependence on payday lenders. But UK banks have so far refused to engage with credit unions and community finance initiatives to tackle the problem, and continue to deny credit to people on the margins.
Sadly, while bank charges remain punitive and non-profit alternatives small scale, there are few viable alternatives to payday lenders. I wonder how many billions more will be lent before the end of the football season?
• Faisel Rahman is director of Fair Finance, a financial inclusion social enterprise. The report, Keeping the Plates Spinning, is at http://tinyurl.com/3xucgre