Parliament is absolutely right to be concerned about payday loans. While accurate figures on short-term, high-interest, unsecured lending are hard to come by, estimates suggest payday borrowers quadrupled to 1.2 million over the three years to 2009. Since then, as incomes have been squeezed even further, many more will have turned to high-cost borrowers hawking their services with jaunty ads on mainstream television.
There are those who would deride all lenders offering typical APR borrowing rates of 4,000 per cent as legal loan sharks. But such lending does have a constructive role, in helping those on low incomes cover the cost of a domestic emergency, say, or spread the cost of Christmas. And legal lending is most certainly preferable to the illegal variety, which may come with rather more unsavoury methods of collecting the debt.
That said, this burgeoning £1bn-a-year industry is in clear need of regulation. And many of the recommendations put forward by MPs on the Business, Innovation and Skills Committee are sensible.
Improved transparency would give borrowers a clearer idea of the credit they are accessing and the penalties of late repayment. Lenders also need to be able to show they have made adequate checks that borrowers can repay. Most significantly, there must be a limit on the number of times payday loans can be rolled over – a practice which can build unsustainable levels of debt, particularly for the most vulnerable borrowers.
That is not all. Continuous payment authority orders on borrowers' bank accounts must be limited, and debt-collection charges capped. The regulator must be given the power to ban harmful products. And we need a faster system for suspending the licences of dodgy companies. There is also a case for setting maximum interest rates for different types of loan, as is the practice in France. The Government might also promote the growth of mutual credit unions as an alternative to payday lenders.
Calls to the National Debtline from people with payday loans have increased sixfold in the past two years. The case for action is urgent.