Want to reduce use of payday loans? Look to the banks
Faisel Rahman, The Guardian
Up to 2 million people could be using payday loans, according to a report last week by the Association of Recovery Professionals (R3). On the back of this news, Labour MP Stella Creasy has called for more regulation of payday lenders and interest rate caps before Christmas.
The R3 report surveyed 2,005 people. Of these, 67 had experience of payday loans – just 3%. The report suggested that over the next six months, up to double that number could seek short-term finance, such as payday lending, to help them meet cash shortfalls. Much of the report, in fact, highlights the difficulties that ordinary households are facing in meeting the costs of paying off bank loans, credit cards and mortgages and coping with tax rises and benefit cuts.
A much more detailed report on the payday lending industry, users and regulation experience was produced last year by Consumer Focus. The report revealed that many people find payday loans convenient, with fund transfer almost instantaneous. Users said they were happy to avoid banks, and could deal with a problem without recourse to family and friends. The data examined how payday use in the US managed short-term credit flows and, in some cases, staved off financial crisis. It also showed how rate caps in two US states had resulted in more complaints about debt problems and higher bankruptcies.
Payday lending can be expensive, with a charge of around £30 per £100 borrowed per month – an APR of around 2,000%. The payday industry argues that such loans should be used for emergencies and are much cheaper than turning to an unauthorised or unarranged overdraft with a high street bank, which can result in a £200 charge for going £100 over an overdraft limit for 28 days – an APR of 819,100%.
The reality for many people is that banks are reducing their net lending, credit card limits are coming down, overdrafts are being withdrawn and loans are only being extended to customers with the best credit ratings. The days of cheap and easy credit for all are gone. This rebalancing is good and needed, but emergencies do crop up and, right now, if you are at your credit limit your options are a payday loan at 2,000% or an overdraft charge of 800,000%.
How, then, to protect borrowers who fall into a spiral of unsustainable debt? Payday lenders, like all consumer credit companies, are regulated by the Office of Fair Trading. The 2010 report by Consumer Focus suggests that if payday loans are used for emergencies and the short term, simply limiting the number of loans allowed per person, per year, would have a better impact. People requiring more than five loans have clearly moved beyond an emergency to a crisis situation, and advice from an independent advice organisation should be forthcoming, rather than more finance. Making lenders share their data would ensure better affordability checks.
Then there is the high cost of short-term finance. If unauthorised bank charges were not so high, payday lenders argue, it would not exist at current levels. It is estimated that these charges run into billions of pounds annually and are disproportionately borne by poorer customers. Banks argue that if they didn’t charge, free banking would become a thing of the past.
The Labour party had a chance to rule against these bank charges in 2007 when the Office of Fair Trading took a test case to court that bank charges were unfair, but the party chose not to act, and the coalition government shows no interest in reviewing the charges.
Taking action against bank charges would help tens of millions of people and stop the growth of payday lending. But which politician is brave enough to be accused of ending free banking?
• Faisel Rahman is director of Fair Finance, a financial inclusion social enterprise.