Is the payday loan market still broken?

There has been a lot of criticism over the payday loans industry, with its sky high interest rates and aggressive lending tactics.  However the Financial Conduct Authority (FCA) stepped in and made massive sweeping changes, so has this had a positive impact on the industry?

It’s been two years now since new regulations were imposed by the FCA, but research from the charity StepChange claimed that the payday loan industry “continues to show signs of irresponsible lending and poor treatment of people in financial difficulty” so, on this basis it seems like the regulation hasn’t had the desired impact.

Figures published by the charity show that the number of people coming to them with “unmanageable” payday loan debts has fallen from 23% in 2013 to 16% in 2016, so this is a move in the right direction.  However the charity still helped 28,000 people in the first half of 2016, and 37% of these had three or more payday loan debts. The average owed was £1380, which is just £17 lower than before the new regulations were enforced in 2015. Indeed, 26% of people that have taken out a loan since this time feel that their lender didn’t take reasonable steps to check that they could afford to repay, which was of huge importance to the FCA when enforcing the new regulations.  Only 19% had a rough idea of the total amount they’d have to repay and 6% claimed they didn’t know at all, which again was a cornerstone of the new regulations.

Perhaps of more concern, was that the survey highlighted unacceptable lending practices and unfair treatment of those customers who were struggling to repay, even after telling their lender.  Of those surveyed, 21% still had interest and charges added, and only 29% were offered an affordable repayment plan.  Indeed 11% were threatened with legal proceedings.

Stepchange are well aware that such issues need to be addresses, but are now increasingly concerned over the rise in non-traditional type loans or ‘instalment loans’.  These loans can be taken out over 2-12 months, as opposed to traditional 30day payday loans.  Such loans are covered by payday rules, but customers could end up paying more as the interest is applied over a longer period.  The charity is calling for the regulator to take further action in this area.

Mike O’Connor, chief executive of StepChange Debt Charity commented that “Regulation can make a significant difference to broken markets and FCA action over the last few years has gone some way to fixing the worst excesses of payday lending, but there is clearly still work to be done. Poor lending practices and the poor treatment of people in financial difficulty have serious consequences,” added Mike. “They trap people in a cycle of repeated borrowing and as their balances continue to mount, so does the stress and anxiety that comes with severe problem debt. It is essential that the FCA review of the payday lending cap is broad enough to fix areas of consumer detriment and poor lending practices. There is also a clear and immediate need for the Government to examine more affordable forms of borrowing for financially vulnerable people, who are often left with nowhere else to turn in their hour of need.”

However it could be a significant period of time before any further rules are implemented so in the meantime if you are struggling with debt, do not suffer in silence.  Seek independent advice through StepChange or the Citizens Advice Bureau, who offer lots of support.  If you are considering a payday loan then think again.  The unsecured loans market has never been so competitive, even if your credit is not perfect, so a small personal loan may help, or even a 0% credit card if you are confident that you can manage it and pay if off within the introductory period.