Payday lenders: angels or villains?
After years of slowly mounting concern surrounding the business models of payday lenders and those caught in their clutches, the dam has finally burst - and with it flows an ultimatum from the Office of Fair Trading (OFT): clean up your act or we'll shut you down.
With APRs into the thousands and inescapable advertising, payday loans have quickly become part of our financial consciousness, but the OFT has highlighted a number of practices that need to change if 50 of the leading lenders are to keep their licences.
A report published last month stated the regulatory body had uncovered evidence of "widespread irresponsible lending", aggressive debt collection methods and a failure to conduct adequate assessments of the borrower before lending.
It gave the lenders three months to change their ways or risk losing their licences and also began consulting on whether to refer the £2 billion industry to the Competition Commission.
Clive Maxwell, chief executive of the OFT, said: "We have found fundamental problems with the way the payday market works and widespread breaches of the laws and regulations, causing misery and hardship for many borrowers."
Meanwhile, the Financial Ombudsman Service has revealed it is finding in the consumer's favour in nearly three quarters of all cases it is dealing with involving payday lenders.
The cost of quick cash
What will you pay to borrow £250 for 14 days? (total cost)
- First Direct authorised overdraft £0
- HSBC credit card cash advance £12.13
- Instantloansdirect £17.50
- The Co-operative Bank unauthorised overdraft £23.10
- Wonga £40.78
- Halifax/Bank of Scotland unauthorised overdraft £70
- NatWest/Royal Bank of Scotland unauthorised overdraft £84
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.