Is it the end for payday loans?

Earlier this week, the Financial Conduct Authority (FCA) fined CFO lending a whopping £34milion for “bad lending behaviour” and “unfair practices”. The company which traded under brands Money Resolve, Flexible First and Payday First has been ordered to hand money back to nearly 100,000 of its customers.

The Citizens Advice Bureau confirmed that payday loan complaints have decreased by 86% between 2013-2016; with the comments of Archbishop of Canterbury Justin Welby declaring war on payday lenders, it seems that the demand for this type of unsecured loan product is in decline.  Indeed since July 2014, more than 1400 companies have left the industry, whilst those that survive are under intense scrutiny and have made significant financial losses.

Wonga, the largest payday lender in the market, was forced to write off £220milion of loans in October 2014, whilst the second largest, Dollar Financial which owns The Money Shop, was ordered to refund £15.4m in the same month, to 147,000 customers after regulators found it was still lending more to borrowers, than they could realistically afford to repay. More recently, in early 2016 Cash Genie went into liquidation after being ordered to repay 20million in compensation.

In a review of payday lending conducted in early 2016 The Citizens Advice Bureau said that “approximately 38% of the 2013 market participants have left the market and therefore can no longer mistreat consumers.” The FCAs introduction of a rate “cap” on interest in January 2015 had a massive impact as it prevented companies rolling loans over and racking up interest upon interest upon interest. According to the FCA, in its peak in 2012-2013 the payday loans industry was worth around £4billion, with around £10-£12milion payday loans taken out per year.  But after the rate cap was introduced, the number of loans made by payday companies fell from 6.3million in the first half of 2013 to just 1.8million in the first half of 2015.

However, some campaigners claim the payday loan industry is simply reinventing itself with “eye-watering” interest rates on three-month loans, or “short term” loans which are aimed at those on incomes below £20,000 per annum. Carl Packman, who has researched payday lenders for the poverty charity Toynbee Hall, said: “It’s not really the case of the rise and fall of the payday lenders. It’s the rise, a hiccup and probably another rise to come. They are shifting to slightly longer two or three-month loans, which are still extortionately priced. The fact they have been able to pay these fines shows they are not just scraping by. There is still a lot of money going through their books.”

Even though the rate cap limits interest charges to 0.8% a day, and no one can ever repay more than 100% of what was borrowed, Wonga’s charge on a £100 loan is still 1509%APR. The Money shop, whose number of high street stores has halved, charges an annualised rate of 709% on a £250 loan, repaid over a four month period.

So what has become of the desperate borrowers that were once reliant on monthly payday loans?  Are there alternative lenders that offer more competitive unsecured loans at more reasonable rates?

Packman claims that some people have simply stopped borrowing, maybe not by choice, but through circumstance and the fact that their credit rating may have been tarnished by numerous payday loans. He does however claim that others have gone into deeper arrears on such things as rent and utility bills, as there has been a steep rise in bailiff orders by the council in recent years.

Citizens Advice adviser Sara Williams, says other forms of high cost credit such as “logbook loans” where money is secured against the borrower’s car, guarantor loans and doorstep lending can be just as problematic for the borrower. “The worst excesses of the payday loan industry have gone”, she said, “but checks on a borrower’s ability to repay are in some cases still inadequate as recent Citizens Advice research shows.”

There is also little evidence that legal doorstep lenders such as Provident Financial have picked up much of the business, or that illegal loan sharks have flourished.

Yet the payday industry insists it has reformed. Russell Hamblin-Boone, of the Consumer Finance Association, which represents around 75% of payday lending firms (although not Wonga), said: “The payday market is unrecognisable today from a few years ago. There are no rollovers, no cold-calling, no aggressive collection tactics and stringent customer affordability checks. Short-term lending now stands as a viable alternative to the mainstream credit market.”