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Payday loans: UK borrowers overpaying by more than £45m a year Payday loans: UK borrowers overpaying by more than £45m a year
(about 7 hours later)
Borrowers who take out payday loans could be overpaying by more than £45m a year because of a lack of price competition in the market, the regulator has found. Borrowers who take out payday loans could be overpaying by more than £45m a year, the competition regulator has found.
The Competition and Markets Authority (CMA) said the industry's focus on speed rather than price and a lack of transparency over fees could be adding between £5 and £10 in repayments to the average payday loan, which is £260 borrowed over three weeks.The Competition and Markets Authority (CMA) said the industry's focus on speed rather than price and a lack of transparency over fees could be adding between £5 and £10 in repayments to the average payday loan, which is £260 borrowed over three weeks.
With customers typically taking out around six loans a year, each one could typically save £30 to £60 annually if the market was more competitive. With customers typically taking out about six loans a year, each one could typically save £30 to £60 annually if the market were more competitive.
Payday loans are set up over days or weeks and are typically for amounts between £100 and £1,000. Interest rates are often above 5,000% APR, but because borrowing is designed to be short-term, lenders claim this is not a fair reflection of the costs. Payday loans are set up over days or weeks and are usually for amounts between £100 and £1,000. Interest rates are often above 5,000% APR, but because borrowing is designed to be short-term, lenders claim this is not a fair reflection of the costs.
However, debt charities and consumer groups say loans can quickly grow as late payment charges are added or borrowing terms extended. However, debt charities and consumer groups say loan costs can grow quickly as late payment charges are added or borrowing terms extended.
The City regulator, the Financial Conduct Authority, has already announced new rules for the £2.8bn industry, which will come into effect in July and will limit the number of times a loan can be rolled over and how often a lender can attempt to recover debts from a borrower's bank account. It is also set to consult on a price cap later in the year. The City watchdog, the Financial Conduct Authority, has already announced new rules for the £2.8bn industry, which will come into effect in July and will limit the number of times a loan can be rolled over and how often a lender can attempt to recover debts from a borrower's bank account. It is also set to consult on a price cap later in the year.
The CMA's provisional report on the market, which follows a referral by the Office of Fair Trading, proposed several measures to make the industry more competitive, including a price comparison website to help people shop around, more real-time sharing of borrowers' credit data and upfront discloure of default charges.The CMA's provisional report on the market, which follows a referral by the Office of Fair Trading, proposed several measures to make the industry more competitive, including a price comparison website to help people shop around, more real-time sharing of borrowers' credit data and upfront discloure of default charges.
The regulator analysed data on 15m payday loans taken out between 2012 and 2013, credit reference agency records of more than 3,000 customers and the results of a survey of 1,500 borrowers. It found that 83% of payday lending customers had taken out a loan online, compared with 29% of customers who took a payday loan on the high street. Two-thirds of customers paid their loans in full on or before the originally agreed date, but 80% took out further loans in the same year. The regulator analysed data on 15m payday loans taken out between 2012 and 2013, credit reference agency records of more than 3,000 customers and the results of a survey of 1,500 borrowers.
It found that 83% of payday lending customers had taken out a loan online, compared with 29% of customers who took a payday loan on the high street. Two-thirds of customers paid their loan in full by the originally agreed date, but 80% took out further loans in the same year.
Within the past five years, 38% of payday loan customers had experienced a bad credit rating, 35% had made arrangements with creditors to pay off arrears, 11% had a county court judgment and 10% had been visited by a bailiff or debt collector.Within the past five years, 38% of payday loan customers had experienced a bad credit rating, 35% had made arrangements with creditors to pay off arrears, 11% had a county court judgment and 10% had been visited by a bailiff or debt collector.
Simon Polito, chairman of the CMA's payday lending investigation group and CMA deputy panel chair, said: "If you need to take out a payday loan because money is tight, you certainly shouldn't have to pay more than is necessary.Simon Polito, chairman of the CMA's payday lending investigation group and CMA deputy panel chair, said: "If you need to take out a payday loan because money is tight, you certainly shouldn't have to pay more than is necessary.
"While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least.""While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least."
He added: "Short-term loans like these meet a very clear need for around 1.8 million customers a year. This level of demand isn't going to go away, so it's important to ensure that this market works better for customers."He added: "Short-term loans like these meet a very clear need for around 1.8 million customers a year. This level of demand isn't going to go away, so it's important to ensure that this market works better for customers."
The charity Citizens Advice said that in six out of 10 of the cases it saw involving payday loan debts, proper affordability checks had not been carried out by lenders and a third of those with difficulties had been put under pressure to extend their loan.The charity Citizens Advice said that in six out of 10 of the cases it saw involving payday loan debts, proper affordability checks had not been carried out by lenders and a third of those with difficulties had been put under pressure to extend their loan.
Its chief executive, Gillian Guy, said a comparison website could be helpful "but it would need to come with a strong health warning about the risks of payday lending and direct people to where they can get free independent debt advice".Its chief executive, Gillian Guy, said a comparison website could be helpful "but it would need to come with a strong health warning about the risks of payday lending and direct people to where they can get free independent debt advice".
She added: "For consumers to have real choice in the payday loans market, they need more responsible short-term credit options – not just the ability to choose between existing providers. The time for high-street banks to enter in to the market and offer a responsible micro-loan is long overdue."She added: "For consumers to have real choice in the payday loans market, they need more responsible short-term credit options – not just the ability to choose between existing providers. The time for high-street banks to enter in to the market and offer a responsible micro-loan is long overdue."
Richard Lloyd, executive director of the consumer group Which?, said the CMA was right that a lack of competition was leading to consumers paying over the odds for payday loans.Richard Lloyd, executive director of the consumer group Which?, said the CMA was right that a lack of competition was leading to consumers paying over the odds for payday loans.
"Forcing lenders to be clear and upfront about costs would help consumers to compare the price of different loans. But this is not sufficient to clean up the payday market and stop the spiral of debt into which so many people fall," he said."Forcing lenders to be clear and upfront about costs would help consumers to compare the price of different loans. But this is not sufficient to clean up the payday market and stop the spiral of debt into which so many people fall," he said.
"We also need to see tougher action by the regulators to clamp down on the excessive charges that borrowers get hit with when they're in financial difficulty.""We also need to see tougher action by the regulators to clamp down on the excessive charges that borrowers get hit with when they're in financial difficulty."