Five Questions About: Payday loans - Loans & Credit - Money - The Independent

 

Five Questions About: Payday loans

What have the high-cost credit pushers done now?

A damning new report published this week concluded that payday lending causes enormous consumer detriment and harm to people who are among the most vulnerable.

Who published the report?

It was commissioned by the Association of Chartered Certified Accountants and written by financial inclusion experts. "Payday lending: fixing a broken market" suggested that "existing online payday-lending business models are reliant on repeat borrowing for their profitability" and "many payday loans serve only to increase the likelihood of future indebtedness".

Any examples of this?

Of course. The report cites the example of an Office of Fair Trading investigation published last year which found evidence of a borrower who had been so poorly served by the payday-loan sector that they had rolled over the same loan 36 times.

That's shocking. But is it just the hard-up who suffer?

No. Unscrupulous lenders who encourage repeat borrowing through rollovers also hit the economy, according to the report. "Not only would many payday borrowers have been better off without these loans but our economy would also have been boosted had that money been left in their pockets," it says. There's also a risk that multiple loans allow lenders to finance each other's activities. In short, more payday loans simply lead to more payday loans. Meanwhile existing regulation may make "bad" behaviours more profitable than "good" ones, leading to the crowding out of responsible lenders.

Is there a solution?

The City watchdog's promised new cap on the total cost of short-term credit could help improve the industry but "affordability should be of primary importance in setting the new rate cap", the report warned.

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