While no loan is ever truly “safe,” payday loans in particular have a reputation for being more dangerous than other lenders. But is it earned?
According to a report commissioned by the Consumer Finance Association (CFA), the percentage of payday loan customers suffering additional charges on their debt has sharply fallen since the launching of stricter new rules, designed to clamp down on predatory lenders, and limit consumers’ ability to get themselves into trouble.
These rules include several safety regulations, which have had a variety of effects. Since the measures’ passing, payday lenders must require their customers to undergo a significantly stricter affordability check, as well as a government-mandated cap being placed on the overall cost of payday loans. Introduced in 2015, these caps are intended to halt the “downward spiral” of fees, keeping things from getting out of control.
Conducted by the Social Market Foundation (SMF), the research discovered that the percentage of loans in which consumers were hit with extra fees (such as those for late payments) on top of their contractual interest has been effectively halved – plummeting from 16% back in 2013, to 8% at the time of the study.
Additionally, research suggests that the so-called “cost cap” on loans has had the desired impact; a consumer who borrowed £200 over the course of 30 days would pay roughly £36 less than they would have in 2013, given the current market averages.
The firm’s study collected data not only from short-term lenders, but also carried out additional survey research on the consumer element, speaking with more than 1,200 payday loan consumers. And what they found supported a long-held belief regarding the payday loan industry; namely, that they’re providing a much-needed service, one that is likely to be filled regardless of their existence.
The survey found that about one in sixteen (6%) of payday loan consumers said that if they had not been able to access a short-term loan, they would have instead turned to an unlicensed lender – who is not a family member, nor a friend – to meet their needs.
Nigel Keohane, the director of research at the SMF, warned policy makers to remain vigilant regarding the potential risks of those citizens who might be excluded from the more conventional market.
Additionally, the study discovered that the average loan size has increased by £11 over the course of the study, rising from £245 in 2013 up to £256 in 2016, without a commensurate rise in unexpected costs, such as late fees. According to the research, the typical consumer of a payday loan likely earns somewhere in the neighbourhood of £20,000 to £25,000, is a male between the ages of 25 and 39, and is employed full-time.
The Financial Conduct Authority (FCA) – the governing body which created and implemented these tougher standards for payday lending businesses – had made it plain that they intended to put “high cost loans” under some very bright lights. These were understood to include overdrafts, door-to-door lenders, lien or “logbook” loans – where collateral such as a consumer’s car is put up as security against the loan – as well as payday loans.
These stronger rules for high-risk loans – which again, include payday lenders – were set into motion following an increase in protest and outcry from debt-focused charities, who spoke of witnessing borrowers sliding into debt spirals, and attempting to staunch the bleeding with payday loans – ultimately making things worse.
And while no industry is going to celebrate having to meet new regulations, the CFA – who represent short-term lenders – is encouraged by the positive trends among their customer base, crediting these high industry standards as leading to better outcomes for their consumers.