Should the OFT have allowed loans at rates of 2,500% a year?
Report gives payday loan companies green light as calls grow for mainstream lenders to offer more low-cost credit
Saturday 26 June 2010
Lenders charging more than 2,500 per cent APR were given the green light last week as the Office of Fair Trading reported that the payday loan market worked "reasonably well" and there was no argument for imposing price controls.
But the verdict has renewed the debate over whether high-cost credit lenders are providing a much-needed service or preying on vulnerable borrowers who cannot get credit elsewhere.
The report looked at the £7.5bn loan market provided by payday loans, home credit, pawnbroking and rent-to-buy firms.
"It is a cruel irony that people who are already struggling financially have to pay so much to borrow money," says Marie Burton, financial services expert at Consumer Focus. "Unless more affordable credit is available, simply clamping down on high-cost lenders will not provide the answer because it may push people to riskier borrowing from loan sharks.
"The OFT's report shows that it would be very hard to boost competition among high-cost lenders and drive a better deal for consumers. It is therefore important that the Government considers how it can make sure lower-cost borrowing, like credit unions, is available to borrowers on low incomes."
Tom Howard, from the Consumer Credit Counselling Service, agrees. "High-cost credit fills a niche for people who are excluded by mainstream lenders. Provided people know what they have to pay and manage their accounts well, then there is not a problem. However, we would like to see the mainstream lenders step up to the plate and provide more options for these borrowers."
Payday loan providers deny they are targeting vulnerable customers. Ohad Hessel, marketing manager at the payday loans company Payday Bank, says: "We are often the only source of lending for those refused credit and in need of emergency financial help. Using an APR is the wrong metric to judge payday loans as the average customer borrows money for just a few days."
For example, borrowing £100 for 20 days through a payday loan company would have an APR of 2,686 per cent, if the fee was £25.94. This is because the APR is the annual rate and works on the assumption that these costs are incurred every month for a year.
People who take out payday loans are not, as you may think, financially excluded, vulnerable low-earners. At least that's what payday loan firm Speed-e-loans claims. It says its customers have an average wage of £21,000 and on average borrow £212 for 36 days. The majority are 23 to 35 years old and some 23 per cent are office workers, 5 per cent are accountants or solicitors and 13 per cent are in sales and marketing.
Gary Miller-Cheevers, chief executive of Speed-e-loans, says: "Payday loans fulfil two roles. Firstly, they are used by people who genuinely run out of money each month and don't have access to an authorised overdraft. Secondly, people use them for lifestyle purchases where they need the cash quickly and for a short period of time. Borrowers have to have a bank account and debit card to access our service so they are not excluded."
One of the biggest gripes against payday loans is their sky-high APRs. But research shows that they can actually work out cheaper than using an unauthorised overdraft from your bank. Payday firms such as Cash Advance Offer and Purple Payday charge £25 for every £100 borrowed each month.
That may sound expensive, but it's not as expensive as taking out an unauthorised overdraft with your mainstream bank. If you slip into the red without permission with Lloyds TSB, for instance, you will pay a £15 monthly fee plus up to £200 in daily fees if you owe more than £100 for 10 days or more in a month. Interest is also charged at up to 19.3 per cent EAR. So you could end up paying £215 plus interest for borrowing £200 for the month, compared to just £50 with a payday loan company. Alliance & Leicester, meanwhile, charges £5 a day up to a maximum 20 days in any month – which is a charge of £100 a month regardless of the amount you owe.
But Confused.com is concerned about how clear payday loan firms make their charges should borrowers miss payments or want to extend their loan. Sharon Flaherty, editor at Confused.com, says: "Most of the payday loan firms we investigated didn't display the penalties charged if people miss payments or want to extend their loan. In one case our researcher was told that details would only be available once they had registered and applied for the loan. People using these services are not likely to be financially sophisticated and could more easily fall into penalty traps. We would like to see firms forced to clearly display their charges – if they are not clearly highlighted then borrowers may believe none apply."
My bank would probably have charged me more
'With such little regulation, these companies can do what they like'
olly stock, a music plugger and DJ, borrowed £200 through Speed-e-loans when his boiler broke down in January.
"I got home really late from a show and realised that the boiler had failed. The flat was freezing. The next morning I called a local boiler repairman and got a quote for £180. Money was a bit tight, so I applied to Speed-e-loans and the money was in my account in less than two hours," says Olly, who lives in east London.
He meant to pay back the loan as soon as he received money from outstanding invoices. But when he was offered a ticket to the Glastonbury music festival, his priorities changed.
"I extended the loan for another month and bought the ticket. I paid back the loan a month later and would definitely use the service again. The charges were all very clear and reasonable and my bank would probably have charged me more. Normally I would just wait till I had the money to buy things, as I am freelance and my income is not regular. But when something like a boiler breaks down it is needs must, so I borrowed the money."
Borrowing the money for 40 days cost him £90.40. Had he taken out an unauthorised overdraft with his bank, NatWest, he could have found himself paying £40 in maintenance charges, up to £180 in fees for transactions while in the red, and interest at 19.24 per cent EAR.
ian thomas is a man with a mission. The 40-year-old public relations account director from Banbury wants four-figure APRs to be outlawed and is leading a Facebook campaign and has set up a website at http://2356percent.co.uk. Here he explains why.
Why do you think payday loans are wrong?
I don't consider the idea of payday loans to be wrong. Everyone, at one time or another, needs short-term cash to overcome a short-term cash problem and there is a demand for these kinds of services. I have a problem with the cost of borrowing.
On small amounts, the interest charged can seem relatively cheap but, when the cost of borrowing £400 is £125 over a 30-day period, that's a very expensive line of credit.
The market doesn't work in favour of consumers and there is a lack of competitive choice. So businesses lend at rates that appear favourable in contrast to high-street bank's unauthorised overdraft rate, but since when were bank's a benchmark of proportionate and fair charging?
What have you done about it?
The 2356percent campaign was a spur of the moment thing. I was off with the kids during their half-term break and saw a Quickquid advert on TV. I was appalled by the headline APR and tweeted about it. The tweet provoked alarm from followers and so I started looking for any groups or organisations campaigning for fair APRs. At the time, I couldn't find any, and so I set up a Facebook Group at http://bit.ly/ahRMHX. Today, we have more than 440 members.
I learnt that the Office of Fair Trading (OFT) was responsible for licensing payday lenders and that regulation of their conduct was virtually none existent. The need for a regulatory framework to ensure borrowers are given the same protection as savers and investors – the principle of fair treatment of consumers – became a focus for the campaign.
I started emailing MPs and Greg Mulholland responded by suggesting the idea of an Early Day Motion in Parliament to draw attention to the issue in the Commons. This gave members of the Facebook group the chance to take part in a letter-writing campaign. Their participation meant that 31 MPs signed the EDM.
The recent report from the OFT, which effectively gives a green light for the payday lenders to simply carry on profiteering, serves to highlight the need for pragmatic regulatory parameters to be set because the approach to personal financial regulation in the UK is fragmented.
For instance, as a consumer, if I want to complain about the conduct of a payday lender, I might expect the FSA to regulate them but they don't so you head to the OFT, which licenses them but doesn't handle complaints. So you have to resort to local Trading Standards, which only have the ability to influence providers in their area and have no sway whatsoever over broader regulatory principles and policy. Regulation in Britain works in favour of those with money and not those who need to borrow it. And that's what needs to change.
What would you like to see changed?
I have a short-term and long-term view on what needs to change. It's quite clear that there is consumer demand for products of this type, and that competition is essential, but that competition is lacking today; lenders charge what they think they can get away with and not what's a fair rate. Banks are licking their wounds from the liquidity crisis and are unlikely to spark competition by entering the market for sub-prime payday lending. So, I would like to see payday lenders brought immediately under the jurisdiction of the FSA's successor and the principle of treating customers fairly applied.
In the long run, I think the emergence of brands like Zopa point the way. If I could wave a magic wand, I would like to help popularise widespread adoption of credit unions. My vision is for a UK-wide peer-to-peer lending and savings platform – underpinned by capital reserves built up by each member of the platform – which offers local credit unions a national infrastructure on which to build their service.
This would enable communities to easily establish their local credit union online – in much the same way as you create a Facebook profile – and effectively shut down access to the market for unscrupulous pay-day lenders. Put simply, I'd like to help beat the payday lenders at their own game – just fairly.
Bad credit history?
People with bad credit history, or those who have been excluded from mainstream banking, can take steps to improve their credit standing.
*Get a copy of your credit file. These are available from Experian, Equifax and Callcredit. Paper versions cost £2 or you can pay more for an online version.
*If there are inaccuracies on your file, write to both the lender and the credit agency asking for a correction. If your name is linked to someone with a bad credit history, but you have no joint finances with them, then ask for a notice of disassociation to be put on your file. If there are good reasons why you have a poor credit history – for example, a divorce or illness – then have a notice of correction put on your file. Any prospective lenders must read the notice and take it into account when you apply for credit.
*Make sure you are on the electoral role.
*Build up other forms of identification such as utility bills in your – or joint – names, a driver's licence or passport.
*If you can get credit then make sure you manage it well by making every payment in full and on time. This will let you rebuild your credit history and show you are a good risk. Your credit history goes back six years so it is possible to repair it over time.
Mark Dampier: 'We're on our own in retirement. They've pulled pensions to pieces'
Questions of Cash: I don't use Amazon Prime, but my credit card bill says I do
Buyers beware of new-build home headaches
Donald MacInnes: 'I have to have £500 a month spare from now until at least 2035'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
- 1 Alan Rickman admits editing 'terrible' script with friends in Pizza Hut behind backs of writers on Robin Hood: Prince of Thieves
- 2 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 3 Professional big game hunter Ian Gibson crushed to death by elephant during hunt
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
- 5 Rebecca Francis accuses Ricky Gervais of using 'influence' to target female hunters after receiving barrage of death threats
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...
Day In a Page
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000