Payday loans in the United Kingdom
Encyclopedia
Payday loan
s in the United Kingdom
are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006 - in 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion. The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective annual percentage rate
(APR). According to Consumer Focus
, "the cost of obtaining a loan online (often £25-£30 per £100) exceeds the costs of obtaining a loan on the High Street (often £13-£18 per £100)" because they reject more applicants and face higher rates of fraud and default.
The payday loan industry generated around £242m in revenue in 2009 - around 20% of the total lending. The largest lender is Dollar Financial Group
(which includes The Money Shop and Express Finance), which provided around a quarter of all payday loans in 2009. In February 2011 Dollar Financial additionally acquired the largest British internet payday lender, PayDay UK, and suggested The Money Shop's network could grow from around 350 shops to around 1200.
The number of people taking out payday loans in the UK in recent years has increased four-fold, to 1.2 million in 2009. Borrowers took out around 4.1 million loans amounting to £1.2 billion in money lent. Payday loan borrowers are taking out an average of 3.5 loans a year and the average size of a payday loan in 2009 was an estimated £294. 67% borrowers had incomes below £25,000.
A typical payday loan could cost £20 for every £100 borrowed, meaning a £300 loan would cost £360 if it was repaid after one month. Since there are no legal limits on rolling over loans in the UK, if the loan was rolled over for six months it could cost as much as £660 to repay the loan in full. There are no restrictions on the interest rates payday loan companies can charge: one UK company offers a "typical APR" of 1355%, although this takes compounding into account; without compounding the APR would be 300%. Another lender advertises an annual rate of 2,225%. Most companies charge 25% for an advance repayable at the end of the month, which explains the high rate; a few charge 30%, which is equivalent to an APR of over 2,000%.
lenders must have a licence from the Office of Fair Trading
(OFT) to offer consumer credit. The Consumer Credit Act 2006
explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence. There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. This means that the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted. Advertising is regulated by the Advertising Standards Authority
(ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.
In June 2010 the Office of Fair Trading published a 'Review of high-cost credit'. In this report they concluded that changes could be made to the industry itself, but that "more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist."
To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report - "We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area."
said in 2008 that "The growing popularity of these kinds of short-term loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK." Chris Tapp, of debt charity Credit Action
, said in mid-2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months."
Credit Action
made a complaint to the UK
Office of Fair Trading
(OFT) that payday lenders were placing adverts on social network
website Facebook
which broke advertising regulations. Their main complaint was that the APR
was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards.
In 2010 a campaign organised by pressure group Compass
to "end legal loan sharking" and apply interest rate caps in the "high cost credit sector" saw over 100 MPs sign an Early Day Motion
in September 2010, and over 200 by April 2011. Other motions on the subject have been made in previous years, and groups such as Debt on our Doorstep
have previously highlighted the issue.
Payday loan
A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...
s in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006 - in 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion. The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective annual percentage rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
(APR). According to Consumer Focus
Consumer Focus
Consumer Focus is a statutory consumer organisation in England, Wales, Scotland, and, for postal services, Northern Ireland, formed in 2008 by the merging Postwatch, Energywatch and the Welsh, Scottish and National Consumer Councils...
, "the cost of obtaining a loan online (often £25-£30 per £100) exceeds the costs of obtaining a loan on the High Street (often £13-£18 per £100)" because they reject more applicants and face higher rates of fraud and default.
The payday loan industry generated around £242m in revenue in 2009 - around 20% of the total lending. The largest lender is Dollar Financial Group
Dollar Financial Group
Dollar Financial Group, Inc. is a US-based financial services group with over 1000 locations in seven countries. It focusses on low-income or bad-credit consumers, providing short term loans , pawnbroking and gold buying services...
(which includes The Money Shop and Express Finance), which provided around a quarter of all payday loans in 2009. In February 2011 Dollar Financial additionally acquired the largest British internet payday lender, PayDay UK, and suggested The Money Shop's network could grow from around 350 shops to around 1200.
Overview
Payday loans are an American phenomenon that have been growing fast in the UK market over the last five years. The premise is that they offer a relatively small amount of cash (usually up to £500) for a short term, around 2 weeks (or until ‘payday’). The providers charge a fee for the loan usually expressed as a flat fee per £100 borrowed – usually around £25.The number of people taking out payday loans in the UK in recent years has increased four-fold, to 1.2 million in 2009. Borrowers took out around 4.1 million loans amounting to £1.2 billion in money lent. Payday loan borrowers are taking out an average of 3.5 loans a year and the average size of a payday loan in 2009 was an estimated £294. 67% borrowers had incomes below £25,000.
A typical payday loan could cost £20 for every £100 borrowed, meaning a £300 loan would cost £360 if it was repaid after one month. Since there are no legal limits on rolling over loans in the UK, if the loan was rolled over for six months it could cost as much as £660 to repay the loan in full. There are no restrictions on the interest rates payday loan companies can charge: one UK company offers a "typical APR" of 1355%, although this takes compounding into account; without compounding the APR would be 300%. Another lender advertises an annual rate of 2,225%. Most companies charge 25% for an advance repayable at the end of the month, which explains the high rate; a few charge 30%, which is equivalent to an APR of over 2,000%.
Regulation
Under the Consumer Credit Act 1974Consumer Credit Act 1974
The Consumer Credit Act 1974 is an Act of the Parliament of the United Kingdom that significantly reformed the law relating to consumer credit within the United Kingdom....
lenders must have a licence from the Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
(OFT) to offer consumer credit. The Consumer Credit Act 2006
Consumer Credit Act 2006
The Consumer Credit Act 2006 is an Act of the Parliament of the United Kingdom intended to increase consumer protection when borrowing money.-Provisions:...
explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence. There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. This means that the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted. Advertising is regulated by the Advertising Standards Authority
Advertising Standards Authority (United Kingdom)
The Advertising Standards Authority is the self-regulatory organisation of the advertising industry in the United Kingdom. The ASA is a non-statutory organisation and so cannot interpret or enforce legislation. However, its code of advertising practice broadly reflects legislation in many instances...
(ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.
In June 2010 the Office of Fair Trading published a 'Review of high-cost credit'. In this report they concluded that changes could be made to the industry itself, but that "more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist."
To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report - "We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area."
Broker fees
Due to high returns enjoyed by payday loans companies they employ vast broker networks. These are sometimes termed as a loanfinder service, and often include a broker fee, which is often payable upfront; meaning the applicant must pay a fee just to apply for an advertised loan. The OFT are trying to push the government to stop the concept http://blogs.mirror.co.uk/investigations/2011/06/oft-urges-government-to-tackle.html. There are now websites that help applicants avoid paying the broker fees when applying for payday loans in the UK.Activism
There has been some technical evolution and criticism of the short-term loans market in the UK. Vince Cable MPMember of Parliament
A Member of Parliament is a representative of the voters to a :parliament. In many countries with bicameral parliaments, the term applies specifically to members of the lower house, as upper houses often have a different title, such as senate, and thus also have different titles for its members,...
said in 2008 that "The growing popularity of these kinds of short-term loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK." Chris Tapp, of debt charity Credit Action
Credit Action
Credit Action is a UK charity founded in 1994 that promotes money education and financial literacy. Credit Action works with government, regulators and the lending industry and has a close partnership with the Consumer Credit Counselling Service , a debt counseling and management service.The...
, said in mid-2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months."
Credit Action
Credit Action
Credit Action is a UK charity founded in 1994 that promotes money education and financial literacy. Credit Action works with government, regulators and the lending industry and has a close partnership with the Consumer Credit Counselling Service , a debt counseling and management service.The...
made a complaint to the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
(OFT) that payday lenders were placing adverts on social network
Social network
A social network is a social structure made up of individuals called "nodes", which are tied by one or more specific types of interdependency, such as friendship, kinship, common interest, financial exchange, dislike, sexual relationships, or relationships of beliefs, knowledge or prestige.Social...
website Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
which broke advertising regulations. Their main complaint was that the APR
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards.
In 2010 a campaign organised by pressure group Compass
Compass (think tank)
Compass is a left wing pressure group, aligned with the UK Labour Party describing itself as 'An umbrella grouping of the progressive left whose sum is greater than its parts'...
to "end legal loan sharking" and apply interest rate caps in the "high cost credit sector" saw over 100 MPs sign an Early Day Motion
Early day motion
An Early Day Motion , in the Westminster system, is a motion, expressed as a single sentence, tabled by Members of Parliament for debate "on an early day" . Controversial EDMs are not signed by Government Ministers, PPS or the Speaker of the House of Commons and very few are debated on the floor...
in September 2010, and over 200 by April 2011. Other motions on the subject have been made in previous years, and groups such as Debt on our Doorstep
Debt on our Doorstep
Debt on our Doorstep is a UK-based campaign against extortionate credit lending and for fair financial services. The campaign, founded in 1999, comprises not-for-profit and non-governmental organisations including Oxfam and the National Housing Federation...
have previously highlighted the issue.