• Posted @ 10:47:5How Do You Solve A Problem Like Payday?6 on 15 March 2014 01 June 2015 | View comments

  • This first post is designed to test our theory that policy and regulation can work for finance providers and their customers. What better test than the most problematic part of the UK’s lending market today: payday loans?

    Last month the Competition Commission published new research on the market. It found over a million people use payday loans. The average loan is around £260, for an average of 22 days. Two-thirds of loans are repaid on time or early, many others are repaid only slightly late. What’s not to like?

    It doesn’t help that the industry’s selling and debt collection practices have been of mixed quality. A raft of new regulation is addressing that. Payday loans are also far from cheap, typically 1000% to 6000% APR, but of course APR’s are difficult to interpret for very short loans.

    The heart of the problem however seems to be that some borrowers - probably only a small minority - can end up owing many thousands of pounds having taken out only a small loan. This is because of the compounding effect when loans are refinanced (either ‘rolled-over’ with the same provider, or more likely as new loans with new providers).  

    The FCA now has to impose a cap on the cost of payday loans by 2 January 2015, in addition to other new regulatory measures. It will consult on proposals for the cap this summer. It’s already clear the cap will take account of the “overall cost of credit”, so including all fees as well as interest.

    Could a rate cap work for both payday finance providers and their customers? It seems unlikely. The cost of providing many payday loans would suggest APR’s far higher than 100%. A lower APR cap - or even an overall cost of credit cap that isn’t annualised - would severely restrict the market. A higher cap meanwhile wouldn’t be seen as protecting customers, as borrowers could still end up with high debts.

    There might be a better policy solution. Instead of capping the rate, the FCA (or the Competition and Markets Authority) could cap the maximum overall cost per payday loan. This would include the principal, interest and all fees, penalties and any other charges. It wouldn’t be a percentage cap, or a cap per £100 of loan, it would simply be a fixed total maximum cost in pounds.

    The maximum overall cost per loan might be set at, say, £400. Or there might be two levels: say £300 maximum for most loans; and a £500 maximum for loans to users who repay on time every time and have only one payday loan with any provider.

    We think this alternative - which as far as we can tell hasn’t been considered before in the UK or other countries - could address the worst problems in the market whilst allowing the market to continue to function. It could work for both finance providers and their customers.

    Do email if you would like a copy of our briefing on this. We’d be very interested in your views.

    Posted @ 10:47:56 on 15 March 2014

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