Independent thoughts on payday lending required

Yesterday’s amendment to the credit bill was unfortunately defeated – let’s just hope that it is down to silly party politics rather than a genuine opposition to capping the cost of credit (or, as the amendment suggested, just looking at it).

A real point of concern is that the hiatus will give the industry even more time to lobby and rally, repeating myths on the impact of a cap on the cost of credit, suggesting that they are responsible lenders who provide a vital service to the poorest, and that restricting their businesses would amount to punishing the most vulnerable in society.

I am not privy to the emails and letters that have been sent to MPs (but I do know that they have been sent). Nor do I get access to meetings or dinners where representatives of the high cost industry engage in conversation with policy makers on how to best regulate the industry. Some activities are slightly more public though, i.e mere mortals like you and I can pick up on them and realise that the industry is nervous. For example, in an article by Chris Blackhurst in yesterday’s London Evening Standard, Wonga was given a platform to express its concerns over the detrimental effects on introducing a cap on the cost of credit. The article also repeated the myth of driving people into the arms of illegal loan sharks, in essence agreeing with the defeatist view of the industry and opponents that, albeit a bit unfair, high cost credit is a necessary social service that we need in a capitalist society.

It’s a shame that the future editor of the Independent didn’t do a little bit more independent research and ask some more challenging questions – even if he didn’t have time to talk to Stella Creasy (or me for that matter), he could have done a little research to find evidence countering arguments for example here, or a list of facts compiled here, or  the views of consumer organisations listed here, just to balance some of the claims made by Wonga and the payday lending industry as a whole. While there are some payday lenders that are “better” than others in terms of credit checking and lending practice, and some have admitted that the industry needs to have better standards, overall the industry repeats the same mantra as the doorstep lenders: that they provide vital funds in emergencies, that people would otherwise not have access to such forms of credit, and that they aren’t that expensive given the short-term nature of their lending (to give some idea of cost, Wonga for example charges £129 for a loan of £400 – I wouldn’t call that cheap).

However, Payday lending is in fact highly problematic.  People take out a loan, and the sum repayable is taken out of their bank accounts on the next pay day. People can defer the repayment by notifying the lender, and they will “only” pay the finance charge (extending the loan, as this is also called). This rolling over can increase the costs considerably, so that the one month prices do actually look cheap – and it can create a debt trap. Opponents of price caps argue that these loans don’t present a problem as long as there are limits to number of times such a loan can be extended (i.e. repayment is deferred by a month, with “only” the admin fee payable at the end of each month). But limiting the number of roll-overs can be circumvented – which has been the case in the US (opens as pdf). In addition to this, there is even less evidence on the real cost of providing this product than there is in the doorstep market, i.e. we don’t know how much profit companies make. It is a huge market: it has grown to £1.2bn according to figures obtained by Stella Creasy. We know nothing about the composition of these profits, how much money they make on interest rates, how much on debt rescheduling and on penalty or admin fees.  Evidence from the US, where payday lending is prevalent, shows that lenders make 90% of their profit from fees.  Before people argue that payday lending isn’t problematic in the UK, and doesn’t charge exorbitant fees, should we not find out a little more about them? Would be nice if Mr Blackhurst would put these questions to Wonga…

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