Payday loans in the United Kingdom

Payday loans in the United Kingdom are typically loans of up to £500 to be repaid over a short term, or until "payday". In the absence of restrictions on interest rates the typical annual percentage rate (APR) for payday loans can be 1,000% APR or more. A typical payday loan in the United Kingdom costs as much as £25 for every £100 borrowed per month.

Shop window in Aberdeen August 2012 APR of 1410.33%

The payday loan industry in the United Kingdom has grown rapidly, with four times as many people using such loans in 2009 compared to 2006. In 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion.^[1] The average loan size is between £265 and £270,^[2] and two-thirds of borrowers have annual incomes below £25,000. In 2009, the payday loan industry generated around £242m in revenue - accounting for around 20 percent of the total lending.

The largest payday lender in the United Kingdom is Wonga, which in 2014 was estimated to have a market share of between 30% and 40%.^[3] The second largest lender is Dollar Financial Group, which operates The Money Shop network, as well as online lending platforms Payday Express, Payday UK, and Ladder Loans.^[4] Dollar Financial acquired PayDay UK in 2011, then the UK's largest online lender, and suggested The Money Shop's network could grow from around 350 shops to around 1200.^[5]

Overview

Payday loans originated in the United States and have been growing quickly in the UK market over the last five years. They offer a relatively small amount of capital (usually up to £500) for a short term, often under two weeks on average (or until "payday").^[6]

The number of people taking out paydyay loans in the UK in recent years has increased fourfold, to 1.2 million in 2009.^[7][8][9] Borrowers took out around 4.1 million loans amounting to £1.2 billion in money lent.^[10] Payday loan borrowers are taking out an average of six loans per year^[11] and the average size of a payday loan in 2009 was an estimated £294.^[7] 67% of borrowers had incomes below £25,000.^[10]

A typical payday loan in the United Kingdom costs as much as £25 for every £100 borrowed per month, meaning a £300 loan would cost £375 to repay after one month.^[12] The UK imposes no legal limit on rolling over loans,^[10] and there are no restrictions on the interest rates payday loan companies can charge: one UK payday lender charges a "typical APR" of 1,355%,^[8] another lender advertises an APR of 2,225%.^[13] Most companies charge 25% for an advance repayable at the end of the month, a few charge 30%, which is equivalent to an APR of over 2000%. Failure to repay a payday loan leads to spiraling APR.^[14] According to Consumer Focus, "the cost of obtaining a loan online (often £25-£30 [per month] per £100) exceeds the costs of obtaining a loan on the High Street (often £13-£18 per £100)" because the lenders reject fewer applicants and face higher rates of fraud and default.^[10] The providers charge a fee for the loan usually expressed as a flat fee per £100 borrowed for the stated short period, usually around £25.

Regulation

Under the Consumer Credit Act 1974 lenders must have a licence from the UK Office of Fair Trading (OFT) to offer consumer credit. The Consumer Credit Act 2006 explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence.^[15] There are currently no restrictions on the interest rates payday loan companies can charge or on rolling over loans, however the government is pending new legislation to cap the costs of such loans.^[16] Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004.^[17] This means that the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.^[18] Advertising is regulated by the Advertising Standards Authority (ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.^[15]

In June 2010 the OFT published a "review of high-cost credit."^[19] In this report they concluded that changes could be made to the industry itself, but that "more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist."^[19]

To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report - "We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area."^[19]

In March 2013 the OFT published a long-awaited update regarding the industry. It was very critical, giving the 50 leading lenders just 60 days to address the issues raised or risk losing their licences. In particular, it cited "a failure to work out whether people could afford the loans, aggressive debt collection practices, a failure to explain how repayments are collected, and a lack of sufficient forbearance for those who cannot afford the repayments." It referred the market to the Competition Commission for "deep-rooted problems in how payday loan companies compete"^[20]

With the newly created agency, the Financial Conduct Authority, due to take over the regulation of the industry from the FSA in 2014, the government expects greater control and powers over rogue lenders. Critics of the industry, including Which? and debt charities, welcomed the developments.^[20] Russell Hamblin-Boone of the Consumer Finance Association, a trade body that represents 70 percent of the payday lending market, dismissed the criticisms. He said the OFT's report was based on findings in summer 2012, when they visited the companies in question, and in the months between the research and the publication of their findings, the industry had done much to improve its practices. He expects all his members will satisfy the OFT within the 60-day period and retain their licences, and he further claimed that he does not believe the whole market is set up to profit on defaulters.^[21]

In January 2015 the FCA introduces caps on what borrowers had to pay back. Under the new rules the daily rate of interest charged must not exceed 0.8% per day, default charges cannot exceed £15 and there is a total cost cap of 100% of the amount borrowed.^[22]

As of 13 July 2016, Google will no longer advertise payday loans. However, specific search queries with the term 'payday loans' (or similar terms) will still show the options for payday loans. The new ad search policy also includes ads for loans with an annual percentage with 36% APR or higher as well as banning ads in which repayment is within 60 days of date of issue.

Brokers

As payday loan companies can achieve large profits from these loans, they employ large broker networks to generate business. These are sometimes termed a loanfinder service, and can include a broker fee, which is often payable upfront; meaning the applicant must pay a fee merely to apply for an advertised loan, in addition to the high rate of interest. The OFT has urged the government to tighten restrictions on payday loans.^[23] There are now brokers that help applicants avoid paying these extra fees when applying for payday loans in the UK.

Criticism

There has been considerable criticism of the short-term loans market in the UK. Vince Cable MP said in 2008 that "the growing popularity of these kinds of short-term loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK."^[8] Chris Tapp of debt charity Credit Action said in mid-2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have such a loan and have problems has been notable in the last six months."^[8]

Credit Action made a complaint to the OFT that payday lenders were placing advertisements on social network website Facebook which broke advertising regulations. Its main complaint was that the APR was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards.^[24]

In 2010 a campaign organised by pressure group Compass to "end legal loan sharking" and apply interest rate caps in the "high cost credit sector" saw over 100 MPs sign an Early Day Motion in September 2010,^[25] and over 200 by April 2011.^[26] Other motions on the subject have been made in previous years,^[27][28][29] and groups such as Debt on our Doorstep have previously highlighted the issue.

The writer Carl Packman has criticised the regulation of the industry. Packman says: "given the regulatory landscape currently in force we have to trust [lenders] on their word that they follow a self-defeating business model ... Indeed payday lenders break their promise on responsible lending all the time."^[30]

The widely criticized payday lender Wonga.com is one of the biggest finance firms in Britain. Wonga has faced widespread criticism over its interest rates, allegedly heavy-handed debt collection methods and its £24 million shirt sponsorship deal with Newcastle United football club ^[31] that some say will tempt impressionable young fans to get into debt. Another concern over evidence it has allowed children to borrow cash. Although under-18s are banned from taking out loans with the firm, young people are finding ways to convince Wonga’s "automated, real-time risk and decision system" that they are eligible for its 4,214 percent APR loans.^[32] In 2012 the company became the target of identity thieves, with hundreds of cases of UK individuals being chased by the company for repayment of loans they have never applied for.^[33] In 2016, Wonga was awarded 'Worst Consumer Credit Provider' at the Consumer Credit Awards.^[34]

In 2013 payday broker Cash Lady was widely criticised over an advertising campaign which featured Kerry Katona.^[35] Following complaints to the ASA in May 2013, Cash Lady adverts were re-edited to remove the phrase 'Fast Cash for Fast Lives'. The ASA believed this implied that payday loans would help fund a high-flying celebrity lifestyle.^[36] In July 2013, Katona declared bankruptcy for the second time, and was dropped by Cash Lady.^[37] One month later the ASA ruled that Cash Lady could no longer use Katona in adverts, as she was too heavily associated in people's minds with debt.^[38]

In January 2014 247Moneybox along with other payday lenders was accused by the consumer group Which? of using “excessive” default fees to cut their headline rates of interest. .^[39] Which? Found that “Ten of 17 leading payday lenders we looked at have default fees of £20 or more, and four charged £25 and above”. Since January 2015 the FCA have capped default fees that can be charged for a missed payment to £15 and that the total amount a borrower has to repay cannot exceed 100% of the amount borrowed, inclusive of all fees and interest.^[40]

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