Borrowers could become prey for controversial ‘loan sharks’ because of a crackdown on payday lending, according to the Consumer Finance Association.
The CFA said that short-term lending has been cut by 68 per cent in two years as regulators impose price caps. In a report to MPs and seen by the BBC, the CFA said that 80 per cent of loan applications are now rejected.
Four per cent of those whose loans were rejected turned to illegal lenders, the CFA said, which charge extremely high rates of interest.
The CFA represents a string of lenders including The Money Shop and Payday Express. It said that in two years, tougher rules and caps on the total a borrower has to pay has wiped out the majority of payday lenders. From 240 in 2013 there are now about 30 to 40 lenders offering short-term loans within the legal price cap in 2015.
Russell Hamblin-Boone, CFA chief executive, said that their analysis of hundreds of thousands of loan applications proved that borrowers are being excluded from credit.
But debt charities and other organisation disagree. "There is no evidence that illegal loan sharking is on the rise and it is dishonest to pretend otherwise," Carl Packman, author of a book on payday loans, told Simon Read. "The CFA would rather have less attention on their members, it is more profitable for them that way. But we shouldn't stand for it. Protecting consumers by tackling loan sharks and regulating payday lenders should not be mutually exclusive."
Citizen’s advice have reported a 45 per cent drop in complaints this year and praised the “strong stance against irresponsible lending” that has prevented more people from being drawn into unsustainable debt.
"Concerns are growing for how they are filling the gap in their finances," Hamblin-Boone said. "It is time to draw a line under the attacks on short-term lenders, recognise the huge improvements in lending and accept that we have a highly-regulated, legitimate market to keep people out of the hands of unscrupulous, illegal lenders."
The Financial Conduct Authority, a consumer watchdog, has set a cap on the cost of payday loans of 0.8 per cent of the amount borrowed per day. It also set at £15 cap of default charges.
This means that no borrower has to pay back more than twice the amount they borrowed more than twice, while lenders cannot roll over a loan more than twice.
The CFA argued that there was still demand for short-term loans. “The demand for short-term credit does not go away with a reduction in supply; consumers still require access to small sum short-term loans to manage their finances effectively,” it said.Reuse content