Do Payday Loans Need Regulating?

by Mark Johnston

The success story of payday loans is a tale of the credit crunch and the recession. The global banking crisis suddenly turned off the tap of wholesale funding for banks and for specialist lenders. It therefore affected which customers they want to lend money to.

Some families have decent paying jobs and are able to meet the month’s expenses with a bit left over. However, most families in the UK are struggling to keep food on the table and a roof over their heads.

Either way, life is unpredictable and unexpected expenses can throw everything in to a complete tailspin.

In these tough economic times, there is no easy answer.

When the unexpected occurs, more and more people are now turning to payday loans to help bridge the gap between pay checks.

The good thing about payday loans is the fact that borrowers do not have to undergo a credit check in order to obtain a loan and once they are accepted the money is usually available immediately.

The down side to these particular loans is the expense. The interest on payday loans is very high, with an annual percentage rate (APR) often above 1731%. Therefore a loan from a payday lender for £400 for say 25 days, with a 1731% annual percentage rate (APR) would require a repayment of around £100 on top of the £400 loan.

Many experts believe that payday loans, by their very nature, appeal to those in serious financial need.

Therefore, the number of people running in to debt through payday loans has quadrupled in the last 2 years, according to one debt advisory service.

Adrian Bailey, a member of parliament (MP), said “during these difficult economic times increasing numbers of people, not least some of the most vulnerable members of our society are relying on payday loans to make ends meet”.

Citizen’s advice chief executive, Gillian Guy, added “people in long term financial difficulty with other debts are much more likely to take out a payday loan to try and deal with these problems”.

The government is currently talking to the payday loan industry about whether its code of conduct needs tightening, with restrictions on the rolling over of debt.

One of the Office of Fair Trading’s (OFT) frustrations in regulating credit companies is that it can take years from the point of deciding to revoke a licence, to getting through the appeal process, to stopping a firm lending. They have therefore called for a fast track procedure to be introduced.

The Consumer Finance Association (CFA), which represents 70% of the payday industry, says it has been working with the government to make advertising transparent and to provide assistance for consumers in financial difficulty.

They argue that on their website it clearly states “payday loans are designed for those who have bank accounts, a job and disposable incomes. They are not loans for people on benefits or very low incomes”.

When the new financial regulator takes control of overseeing the consumer credit market they will force these companies to undergo more rigorous checks than at present and if they do not adhere to this they risk an unlimited fine.

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