Why Payday Lenders Have A Poor Reputation
Not much of the financial services industry is widely loved by the general public. Even before the banking scandal and economic collapse of 2008, people viewed financial workers with suspicion - from bank managers to insurance salesmen.
No other area of the credit industry though has attracted such a bad reputation as that of payday lending, and some of the widespread industry practices have lead the regulators (the Financial Conduct Authority) to strongly tighten up the rules applying to payday loans, whereupon a large number of lenders simply packed up shop and exited the market.
What were some of the problems?
When reviewing adverts for payday services, the FCA found that a large proportion of them gave a misleading picture of the product on offer, playing up the ease of getting a loan while playing down the dangers. In some cases, adverts were judged to be deliberately targeting children - even though credit is only available to the over 18s - in what was seen as an attempt at 'grooming' future customers. From July 2014 all payday advertising must carry clear risk warnings.
The most obvious problem is the high interest rates charged on payday loans. While the high representative APR figures north of 2000% are perhaps misleading - the APR is a measure of interest paid over a year, while payday loans are meant to be taken out for only days or weeks - there's no doubt that this is an expensive form of finance. For a one off loan in an emergency, it might be seen as a price worth paying, but when 'rollovers' come into play the picture changes dramatically.
We cover elsewhere the spiralling costs that rolling over your payday loan for a another month will cause. It was long suspected that this was the main way in which lenders made their profits, by actively encouraging rollovers or even pressurising the customer into them. The FCA have now put a stop to this, limiting rollovers to two, after which a sensible payment plan must be set up if the loan can't be repaid on time. Also, anyone asking for a rollover should now be given information on free debt advice.
It was found that with up to two thirds of borrowers, lenders did not check if the customer could afford to repay the loan, nor was it checked how many other loans might be open with other companies. This could obviously lead to financial difficulties, when people seeking a payday loan are not likely to be in the best financial position to start with.
Payday loans are repaid using a mechanism called continuous payment authorities (CPAs). These allow the lender to dip into the borrower's bank account at any time to repay the debt, even if that would leave the customer with no funds for living essentials. It was found that many companies tried to use a CPA up to ten times a day, to siphon out any money from the account more or less as soon as it arrived, even if it was just a small amount and not the full debt. From now on, only two unsuccessful CPA attempts may be made, and partial repayments will not be allowed.
Further, nearly a third of surveyed customers had not had the CPA mechanism clearly explained, and two thirds hadn't been told that a CPA can be cancelled by the customer nor how to go about this.
Aggressive And/Or Illegal Debt Collection Practices
Quite apart from the abuse of the CPA system, many lenders were found to be using aggressive collection practices on unpaid debts, including multiple daily telephone calls at work and at home, and threatening letters. The most egregious example of threatening letters was carried out by one of the biggest names in the industry, Wonga. They were found to be sending out collection letters from fictitious legal firms, with the obvious intention of scaring debtors into paying up. They have been fined £2.6m for this.
The Future of Payday
So what does all this mean for the future of payday lending? Despite some of the problems which will remain (for example the cost), it is to be hoped that after this shake up customers can make use of what can undoubtedly be an occasionally useful service, without being preyed on by unscrupulous operators which have now either departed or have radically cleaned up their act.