Cracking down on the payday lender Wonga is just the first step

http://www.theguardian.com/commentisfree/2015/apr/22/wonga-cracking-down-payday-lenders

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Wonga, the firm that for so long was seemingly the standard-bearer for an industry that prided itself on delivering virtually instant, few-questions-asked loans, said on Tuesday that it had incurred losses of £37.3m last year.

The company says that these losses partly represent its effort to fix “the problems of the past” and to “repair our reputation and gain an accepted place in the financial services industry”.

This, combined with last month’s news that the payday lending market is starting to contract, appears to be a clear indication that the Financial Conduct Authority’s (FCA) new tougher rules are starting to bite.

Related: Wonga weighs up a name change as it slumps into the red

Much of the debate has now shifted – rightly so – to what happens to those people who can no longer get access to payday loans. The answer from some quarters, particularly the payday loan industry, seems to be that people excluded from this market, and mainstream credit more generally, will end up in the hands of illegal loan sharks.

While this is an understandable fear, there is little evidence to bear it out. FCA research showed that people were unlikely to go to illegal lenders. Only 5% of customers turned down for a payday loan said they would even consider a loan shark.

What we at the StepChange debt charity have seen over the last few years is that payday loans are a highly destructive form of credit that traps people in downward cycles of borrowing, and which often serves to make them even more financially vulnerable.

Last year, about 12,000 of the more than 75,000 people who sought our help with payday loan debts had five or more such loans. The depressingly familiar tale we hear from these clients is how they took out a second payday loan to help pay back the initial loan, and a third to cover the second, and so on, and so the debt gets deeper and deeper and more unmanageable.

Much of the emerging debate on what comes next in a post-FCA payday world seems to be based on what our charity believes is the misguided premise that people who can’t access payday loans simply need a different type of credit. The fact is that for many people already in financial difficulties, any form of additional borrowing (especially one where the repayments relative to income are so high) is liable to make a bad situation worse. We do need more affordable forms of credit, but we should not delude ourselves that high-risk lending will ever be cheap.

Last year about 12,000 of the more than 75,000 people who sought our help with payday loan debts had five or more loans

Fundamentally we need to find a way to help people get back on their financial feet.

Better regulation of the payday loan industry is positive news, and we are hopeful that the era in which firms were allowed to put profit before good outcomes for their clients is coming to an end. But tougher regulation of the market is only half of the story. Tackling the demand for such loans and, more broadly, challenging the idea that the answer for people in financial difficulty is for people to borrow is the next step. Credit can give people the illusion of a financial safety net, but is all too often a trap. We need to do more to help people on low incomes save, since most of the tax incentives for saving goes to people on middle to high incomes.

People who fall into financial difficulty can easily become trapped in a vicious and unsustainable cycle of borrowing, using more credit to pay off credit as they get further and further into trouble. This is as true of credit cards and personal loans as it is of payday loans. Early intervention, advice and support to help people deal with their debts in a sustainable and affordable way is one of the best ways to achieve this. The government recently announced its plans to consult on proposals that would give people “breathing space” through guaranteed freezes in interest and charges when they take action to tackle their debts. The next government must complete this review and help break this endless cycle of borrowing.