It has been revealed by the Competition and Markets Authority (CMA) that UK borrowers could be overpaying on their payday loans by more than £45m a year. The regulator found a lack of competition in the payday loan industry.
In the payday loan market, the focus is often on speed and convenience of the loan rather than repayment fees and terms. There has been wide criticism of the industry for a lack of transparency when it comes to repayment fees.
The average payday loan customer takes out around six loans a year. The research found customers could save around £30 to £60 annually on each loan if the market was more competitive. Chairman of the CMA’s payday lending investigation group, Simon Polito 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.”
The interest rates on payday loans are often above 5,000% APR. Those within the industry claim the high interest rates are not an accurate reflection of their costs as they are designed to be short-term loans. However, debt charities have criticised payday loan companies for their extremely high late payment charges and extended borrowing terms.
Richard Lloyd, Executive Director of Which? agreed the CMA was right. A lack of competition is meaning consumers pay more than they should for payday loans. 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.”
The regulatory body, The Financial Conduct Authority has announced new rules for the industry which will take effect in July. These new measures will limit the number of times a payday loan can be rolled over and extended. Also, how often a lender company can try to recover debts from the borrower’s bank account. The Financial Conduct Authority is due to consult on a potential price cap later in the year. They also proposed a price comparison website that would help people compare loans and shop around.
The regulator looked at data on 15 million different payday loans taken out by people in the UK between 2012 and 2013; a survey carried out amongst 1,500 borrowers and credit reference agency records. They found 83% of people who had taken out a payday loan had done so online. While 29% took out a loan with a high street payday lender. They discovered two thirds of customers paid their payday loans in full either on or before the agreed date. However, 80% took out a further loan within the same year.
Over the past five years, 38% of payday loan customers had experienced a bad credit rating and 10% had been visited by a bailiff or debt collector. The Citizens Advice Bureau said in six out of ten cases it witnessed involving payday loan debts, comprehensive affordability checks had not been done by lenders. A third of those struggling to repay had also been encouraged to extend their loan by the lender. Chief Executive of the Citizens Advice Bureau, Gillian Guy said; “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.”