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Payday loans – the quick fix that could spiral out of control

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Profile photo of Nisha Schumann Nisha Schumann Economic Policy Team
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Need some dosh, wonga or moolah? If this doesn’t mean anything to you, you’re probably not one of the 1.2 million Brits who took out a payday loan in the past year. And there are very good reasons why you shouldn’t…

I’ve spent the last few weeks rummaging through payday loan websites. And not because I’m desperate for some cash, but to find out how good (or bad) lenders are at informing customers about the key features of these loans that often come with an expensive price tag. Result: not very good.

And although I’m greeted with advertisements to take out speedy and easy payday loans everyday, knowing what I know, I’m not tempted in the slightest.

Can’t afford to borrow? No problem!

We found that 8 out of 34 payday lenders did not perform a credit check as part of the application process. But even if they did, that doesn’t stop them from lending to people who cannot afford to pay them back.

Our survey of payday loan customers found that almost half had rolled over their loans at least once – clearly a sign that people struggle to repay the loan on time. Yet more than half claimed to have received communications from lenders encouraging them to do so. This seriously puts into doubt lenders’ claims that they are ‘responsible lenders’.

We also found that a third of payday loan customers experienced financial difficulties as a result of taking out a loan, such as being unable to pay for essential bills. This is unsurprising given that most lenders do not actually ask you for any financial information other than your salary – hardly a thorough way of assessing whether somebody can afford a loan.

And since over 60% of the people we asked took out payday loans to pay for essential bills anyway, they’re getting caught in a spiral of debt, where they’re hit with exorbitant penalty charges because they can’t afford to pay back the loan on time.

KA-CHING! The sound of default

Judging by what some lenders charge you for reminder letters, you could be forgiven for thinking that they must be using diamond-encrusted envelopes.

One lender, Quid24.com, charges £25 for each reminder letter they send you. And they send them quite often! The fifth email on the tenth day of missing your payment will even set you back by £50. This means that a small loan from this lender could hit you with as much as £150 extra, which is hardly what you want to hear if you already struggle financially.

In fact, I struggled to work out exactly what it would cost me if I defaulted, as many lenders don’t put this information on their website. If it is stated at all, it’s often only put on an FAQ page rather than the terms and conditions where they belong.

Despite all this, the market for payday loans is growing as many people have nowhere else to turn for emergencies. Would you take out a payday loan? If not, why not? Or do you think there’s a place for payday loans provided lenders clean up their act?

What do you think about payday loans?

Payday loans should be banned altogether (52%, 113 Votes)

They would be OK provided payday lenders cleaned up their act (37%, 81 Votes)

If people need a payday loan, then leave them to it (11%, 23 Votes)

Total Voters: 217

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Comments
19
Alan Stuart says:
18 May 2012

If 60% of payday cusomers were experiencing difficulies in paying for essentials before taking a loan and this reduced to 30% after taking a loan, is that not an improvement ?

It seems the only problem with payday loans is the cost of defaulting. However, the cost of defaulting on mainstream financial products can be much higher – CCJs, charging orders, repossession etc. Default on your council tax and you can be sent to prison. Since council tax is a debt to the state, perhaps MPs should look at their own policies towards defaulting debtors before getting too busy censoring others.

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Nisha Schumann says:
18 May 2012

Hi Alan,

You’re quite right in pointing out that for some people payday loans or similar high-cost loans are an important lifeline. However, I still think that having almost a third of people still being in financial difficulty shows that it might not be the best solution even though it is an improvement for some. There is also a more fundamental issue around people not having access to affordable credit in the first place and banks not offering products that could compete with payday loans (ie. loans that are short term and with fast access).

Our main concern is, as you pointed out, around default charges. We’re not saying that payday lenders are worse than others but they (and others) still need to improve the way they charge people in financial difficulties and treat them fairly.

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LolaB says:
18 May 2012

“However, the cost of defaulting on mainstream financial products can be much higher – CCJs, charging orders, repossession etc. Default on your council tax and you can be sent to prison.”

I am quite sure that charging orders and repossession is also what you will face when actually defaulting on your payday loan.
Council tax is a tax you have to pay and no loan, so that is not even comparable to the cost of taking out a loan (apples and bananas, right).

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Damon Lynch says:
18 May 2012

Help Stella Creasy MP take on the legal loan sharks
The vote for proposals to tackle legal loan sharking will take place on Tuesday 22 May 2012. Please ask your MP to vote for amendment 40 of the Financial Services Bill and help give British consumers the same protection from payday loan companies other consumers across the world enjoy!
#SaveBianca! Ask Your MP to help end legal loan sharking on Tuesday 22 May 2012!

Hello!

The vote for proposals to tackle legal loan sharking will take place on Tuesday 22 May 2012. Please ask your MP to vote for amendment 40 of the Financial Services Bill and help give British consumers the same protection from payday loan companies other consumers across the world enjoy!

In a House of Commons debate in April the Government Minister responsible for this bill Mark Hoban agreed the Financial Conduct Authority should be able to regulate the cost of the credit, but refused to back this amendment which would explicitly authorise the FCA to do this. They plan to tell their MPs to vote against it and so stop this proposal becoming law.

Independent consumer legal advisers are clear – without explicit authority to do this the regulator will struggle to use new powers as these companies will contest any such action in the courts. The Office of Fair Trading has also admitted the involvement of ‘expensive lawyers’ in cases has influenced their ability to act, highlighting the need to address this problem.

This amendment is a key tool in the fight to tackle legal loan sharking – Fines will only have a limited impact on an industry which is making millions lending money at astronomical rates of interest to British families. On the otherhand, capping their charges could send a strong signal about what costs of credit will be tolerated in the UK. Its the first step towards securing industry wide caps on the total costs of credit, and so giving British consumers the same protection from these loans that others around the world enjoy.

Below is a sample text to use to email your MP to ask them to vote for this amendment – you can find the contact details of your MP here. You can also help by tweeting about the campaign using the #savebianca hashtag in reference to the recent Eastenders storyline on this subject!

Help me make a difference to the families in our communities struggling financially because of these companies by taking action- let’s together end legal loan sharking in Britain!

Stella Creasy
Labour and Co-operative MP for Walthamstow
p.s. Please also share this email with your family and friends to ask them to defy the Government and support this amendment on Tuesday!

Suggested text to send to your local MP
Dear XXX
As one of your constituents I’d like to ask you to vote on Tuesday 22 May for an amendment 40 to Clause 22 of the Financial Services Bill to help tackle legal loan sharking.
In an industry making so much money from lending to people at excessive rates of interest, fines will do little to curb their behaviour- one firm posted a pre-tax profit of £162m last year, and another paid its chief executive £1.6m. On the otherhand, giving the new regulator explicit powers to cap the charges they can set would send a strong message to this industry about the costs for loans that should be considered acceptable and the way they can treat British consumers. It could make a real difference to the millions across our country now struggling financially who are borrowing from these companies to make ends meet by encouraging firms to reduce their charges.
Ministers claim they support the spirit of the amendment but refuse to vote for it- legal advisors are clear that without explicit powers to act, these companies will be able to challenge action in the courts. Don’t let the fight against legal loan sharking become a fee generating opportunity for lawyers- please vote for this amendment on Tuesday and join the fight to end legal loan sharking in Britain.
I look forward to reading that you voted for this amendment,

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Damon Lynch says:
18 May 2012

Sorry Nisha
I meant to compliment you on a well written ,interesting article.
You must have worked hard.
I was that involved in posting i forgot to put it in.
You will go far in your profession that is for sure.
Well done.

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Alan Stuart says:
18 May 2012

Lola, council tax enforcement is relevant because we’re discussing the enforcement of debts and it is completely irrelevant, in that context, who the creditor is and what the debt is for. As for charging orders and possession proceedings – no, these don’t happen with payday loan debts.

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Nisha Schumann says:
18 May 2012

In our view payday lenders should meet the highest standards when it comes to how they deal with customers in financial difficulties. Yes there are probably businesses or other organisations that are worse but that shouldn’t justify bad behaviour just because it’s less bad than what others do.

With mortgage arrears for instance, the FSA sets guidelines on how lenders can charge borrowers. Charges have to be proportional and fair and lenders have to show that the costs are justified. We’d like to see a similar approach taken in payday lending to put a stop to excessive charges.

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LolaB says:
18 May 2012

Alan,

I see your point on the council tax, and yes, so it is probably a case of apples and apples (or rather debts) here. Apologies for that. I guess I should switch my brain on next time before typing away.

For charging orders etc, I need to take your word, I have little experience on this matter.
What I meant is simply that payday lenders surely have some way of reclaiming their outstanding debt, no? Since the outstanding amounts are obviously much less than what you would get if you default on your mortgage, say, it would make sense that they would not be able to send the repo man around. But surely, if you cannot pay, you either have to declare yourself bankrupt or, in the most extreme cases, go to prison — just as with the council tax (for which I suppose this is also reserved only for really extreme cases)?

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Alan Stuart says:
18 May 2012

Lola, the high APR on payday loans is because of the high default rate and the minimal enforcement action possible. Put simply, those who do pay have to subsidise those who don’t. No one is made bankrupt over payday loans – the costs for both creditor and debtor make it uneconomic ( min £750 ) and no-one can go to prison over a civil debt – only Crown debts like Council Tax and, oddly, failing to buy a TV licence. Consequently, if someone took out a payday loan to pay council tax it could be helping them to avoid prison , not end up there. There are, of course, problems as in most service industries. Real competition and transparency in charges would make a big difference. APR is meaningless in the context of very short term loans and a different form of calculation to allow customers to compare one with another would be a big step forward.

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richard says:
21 May 2012

To me this convo is only relevant IF there was an alternative system that allowed the very poor and cash strapped to obtain a loan at advantageous rates.. There isn’t – Banks do not loan to the poverty stricken – so these people (and I know many) have no choice – use a pay day loan – or be evicted or starve or wear no shoes etc etc.

I notice that the majority who answered the poll about pay day loans voted to ban them – They are not living in the real world.

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Nisha Schumann says:
21 May 2012

Hi Richard,

I think you’re making a very good point. There are too few alternative and affordable credit solutions and those that exist (Social Fund & credit unions) are used by few people (credit unions are around 2% of the market compared to 7-8% for payday lending). The supply from these is also grossly insufficient to cover the demand for short-term credit.

We do not therefore think that they should be banned as they are a vital lifeline for many people – but we do want lenders to adher to common standards of transparency and decent customer treatment, esp. those that are in arrears or face financial difficulties.

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Damon Lynch says:
21 May 2012

So the only answer at the moment seems to be for people who find it impossible to get a loan from the bank is to join a credit union,wait a few weeks then apply for a loan.Some credit unions are offering paydayloans at favourable rates but only a few at the moment.It seems this is one of the only alternatives to the payday lenders.The other option does not bear thinking about. The credit union rates for loans can’t be beaten.The credit unions are modernising and hopefully will be joining the post office network and making it easier,faster and accessable to millions more people.Speed is so important in todays world. Just in case anyone is credit union curious link here. http://www.findyourcreditunion.co.uk/home

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Miranda Akhurst says:
30 May 2012

The Office of Fair Trading is carrying out a review into the payday lending market. We’ve already shared Nisha’s research with them, but you too can contribute to their review by sharing your experiences of payday lending.

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PM says:
24 August 2012

Being an English language teacher I was interested in the article “Do you irritate your colleagues by being an ‘office waffler’?” in The Daily Telegraph 24-8-12 and in it the company Wonga is mentioned as carrying out the study. “Wonga.com” is there to see. I went to the website thinking about the possible language angle and at first thought that it must be a spoof – like some reviews on Amazon. Then I checked out the name with you and see it is real.
The Daily Telegraph have plummeted in my estimation. Hence this comment.
Product placement of the most awful, awful kind.

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wavechange says:
28 September 2018

Just click on ‘Report’ and it saves off-topic comments like ours.

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malcolm r says:
28 September 2018

@gmartin, afternoon George. As the promotional post has disappeared the above three posts could be removed?

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George Martin says:
28 September 2018

Hi Malcolm. Agreed, I’m sure no objections from @wavechange here either.

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wavechange says:
28 September 2018

Please do as you see fit, George. I’m not happy that we should ever be openly discussing whether posts are acceptable.

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malcolm r says:
28 September 2018

I’m not happy that a pay day loan company should use a Convo to advertise their service. Best it has gone. Best also done openly in my view. It is only in clearcut cases that I think acceptability or otherwise should be discussed, I’d agree.

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