21st July 2015
The number of people taking out payday loans and short-term credit has reduced by 68% over the past two years due to tougher regulation, but there are fears that consumers may be turning to other forms of risky borrowing.
A report to MPs by the Consumer Finance Association, a trade body representing payday lenders, says that price caps on payday loans have resulted in a sharp contraction of the market, but it claims that new risks are emerging for low and middle income borrowers. It argues that borrowers may instead turn to illegal loan sharks or may miss payments that will end up costing them more than a payday loan.
However, separate research by Citizens Advice puts a different perspective on the figures.
Data collected from CFA members shows that lending in March 2014 was down 54% on the previous year. A year later, lending had dropped by 68% on the peak of the market in 2013. In 2015, the CFA says its members are rejecting approximately 80% of applications.
The trade body claims that a large proportion of borrowers who are now denied short-term credit, are facing financial difficulties as a result. Of those surveyed: 26% said they failed to pay some form of bill or credit repayment; 8% had used an unauthorised overdraft on a personal bank account; and 4% had borrowed from an unlicensed lender. Only 9% said they chose to do without whatever they intended to pay for with a loan, with just 2% turning to a credit union.
Meanwhile Citizens Advice figures show a 53% drop in the number of payday loan problems it helped with in April to June 2015 compared to the same time last year.
The service helped with 4,315 payday loan issues in April to June 2015, a fall from 9,243 in April to June 2014.
The decrease in payday loan problems began in April 2014. This was when the Financial Conduct Authority introduced new rules for payday lenders and took enforcement action.
Previous analysis from the charity also finds one in four people with a payday loan could have borrowed from a bank instead.
But last week it warned that guarantor loans are just as dangerous as payday loans and called on the watchdog to act before it is too late.
It says that these loans are typically in the range of £1,000 to £7,500 with average interest rates of 46.3% and are often marketed at borrowers with poor credit histories. This puts them out of the definition of high cost credit but Citizens Advice believes they can be just as damaging.
It says 43% of guarantors who sought help from Citizens Advice were unsure of the extent of their responsibilities. Furthermore, it says that guarantors can still be liable to pay off a debt even if the borrower has died.
Russell Hamblin-Boone, chief executive of the CFA, says: “Our analysis of hundreds of thousands of loan applications proves that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances.
“It’s time to draw a line under the attacks on short-term lenders, recognise the huge improvements in lending and accept that we have a highly-regulated, legitimate market to keep people out of the hands of unscrupulous, illegal lenders.”
Gillian Guy, chief executive of Citizens Advice, says: “High-cost credit is not the answer to financial difficulties.
“All too often payday lenders were lending to people to who couldn’t afford to repay. The 53% decrease in payday loan issues reported to Citizens Advice shows the new regulations are having a positive effect for consumers. The FCA needs to keep an eye on newer forms of risky credit like guarantor and logbook loans, as well as payday lenders.
“We are seeing a shift away from consumer credit debt towards problems with council tax, rent and utilities, as people struggle to cover day to day costs.
“There is a need for more responsive short-term credit options from high street banks. But it is also crucial that banks and creditors direct people towards free debt and money advice, especially when borrowing is not a suitable option for them.”
Another charity has also seen a reduction in the number of people facing payday loan problems.
Peter Tutton, head of policy at StepChange Debt Charity, says: “The proportion of clients we are seeing with payday loans among their problem debts has fallen significantly, from 24% a year ago to 16% now.
“This is largely the impact of regulation, and is very welcome. The important and necessary steps taken by the Financial Conduct Authority are starting to clean up problems in the payday loan market but we are concerned about the affordability and sustainability of some of this lending. The payday loan market is being reformed, but the job isn’t done.
He adds: “We need alternatives to high cost credit that will help people get through financial difficulty. The introduction of statutory ‘breathing space’ protection would give people in temporary financial difficulty respite from spiralling interest, charges and enforcement action by creditors.”