Payday loan costs set to tumble after CMA proposal
Payday loan costs could soon plummet, if proposals by the Competition & Markets Authority (CMA) are adopted.
The CMA said payday lenders should make their products visible on comparison websites a move that would see increased competition lead to lower fees.
"Greater price competition will make a real difference to the 1.8 million payday customers in the UK," said Simon Polito, chair of the Payday Lending Investigation Group at the CMA. "At the moment there is little transparency on the cost of loans and partly as a result, borrowers don't generally shop around and competition on price is weak.
"By ensuring that there are accredited websites providing impartial, relevant and accurate information about payday loans, we can make it easier for customers to make comparisons and there will be a much greater incentive for lenders to offer lower cost loans and to win borrowers' business.
The organisation has also proposed that payday loan brokers (websites that find payday loans for customers, for a fee) need to explain exactly what they do upfront to customers.
The CMA said that at present consumers often think a broker is an actual payday lender and do not realise they are paying the broker as well as the lender's fees.
"We want customers to know who they are really dealing with, and the basis on which their applications are being referred to lenders, so that they can make informed choices," Polito added.
The CMA also wants payday lenders to be far more transparent on late fees and charges – which are not always clear to customers when choosing payday loans. It also says real-time sharing of data should be adopted across the sector, to help prevent instances of people taking out multiple loans with different lenders.
Which? executive director Richard Lloyd said: "These proposals, alongside other reforms to the payday market, will be good news for millions of borrowers but information alone will not be the answer to the bad practices found across the credit market.
"More must be done to put consumers firmly in control of their borrowing, starting with the Financial Conduct Authority looking at the whole of the credit market and cracking down on excessive fees across all forms of credit, including unauthorised overdrafts."
Peter Tutton, head of policy at StepChange Debt Charity, added: "The CMA finds that the lack of real-time data sharing harms competition, it also harms borrowers. We continue to see the damage caused by borrowers coping with the burden of multiple payday loans. Too often firms are unaware of whether people have existing payday loans with other lenders and then compound financial difficulties by offering further loans. We urge the Financial Conduct Authority to mandate a system of real-time data sharing."
There has been a significant increase in the number of payday lending complaints brought to the Financial Ombudsman Service (FOS) over the past couple of years and it is currently taking on around 70 new cases each month.
So far this year (1 Jan - 30 Sept 2014) the FOS has taken on 613 new payday loan complaints, compared to 506 in the same period last year - a 20% increase.
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.
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.