Number of payday loan users has quadrupled
The number of people taking out expensive payday loans has quadrupled over the last four years, a new report by Consumer Focus highlights. Consumer Focus is warning that banks need to offer affordable short-term loans as alternatives, as well as recommending stronger safeguards to protect consumers from spiralling payday loan debts.
To find out more please see our report Keeping the plates spinning (PDF 649KB) and press release.
Number of payday loan users has quadrupled – Consumer Focus research reveals
The number of people taking out expensive payday loans has quadrupled over the last four years, a new report by Consumer Focus highlights. The consumer champion warns that banks need to offer affordable short-term loans as alternatives, as well as recommending stronger safeguards to protect consumers from spiralling payday loan debts.
In its study – ‘Keeping the Plates Spinning’ – Consumer Focus estimates that the number of people using payday loans has increased fourfold since 2006 to 1.2 million people, borrowing a combined £1.2 billion.1 Charges typically range from £13-£18 interest for every £100 borrowed, but can be as high as £30 per £100 for some online providers. This can generate APRs in the region of 1000% to 2000% given the short-term nature of these loans.3
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. If the loan was deferred or “rolled over” for six months it could cost as much as £660 to repay the loan in full.2
The new research estimates that payday loan borrowers are taking out an average of 3.5 loans a year. Consumer Focus is urging a precautionary approach from industry and regulators to stop borrowers becoming dependent on this form of high interest credit.
Other key findings from the new research show:
- Last year, the average size of a payday loan was an estimated £294
- An estimated two thirds of payday loan borrowers have a household income of less than £25,000
- Payday loan users tend to be young and single. It is estimated that over half of borrowers are under the age of 35 and 60 per cent are not married or cohabiting
Payday loans are short-term loans typically repaid on the customer’s next payday often with a post-dated cheque or authorisation to make an automatic withdrawal from the customer’s account. The danger for consumers comes when they take out a loan and cannot repay it the next month. If they defer payments or take out repeat loans, charges can quickly balloon. People can find themselves dependent on loans and facing a downward spiral of increasing debt.
The market is still developing in the UK and the report warns that the number of payday borrowers could potentially rise by a further 45 per cent in the future. The study looked at payday lending in the UK and how it compares to the US, where it is a more established form of high-cost credit. Concern about payday loans has led to a number of US states banning them, although there is a lack of conclusive evidence that doing this necessarily helps consumers. With limited alternatives available from mainstream lenders, Consumer Focus believes reform of the UK market is needed rather than an outright ban, which could push people into using illegal loan sharks.
Marie Burton, financial services specialist at Consumer Focus, said:
“With the credit crunch, demand for short term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders. Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.
“These products are controversial, but we don’t agree with calls for them to be banned. Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks. Instead we need sensible safeguards now to stop borrowers becoming dependent on this high cost credit and prevent even more stringent controls being needed in the future. We also need banks to provide alternative short-term credit to suit the needs of cash-strapped consumers.”
Consumer Focus’s further in-depth qualitative research4 with payday loan users suggests that some borrowers like payday loans, despite the high interest rates, because they are quick, convenient and it is easy to understand how much it will cost them to repay the loan. Some consumers in the study choose them over mainstream borrowing from banks because they fear being hit by unexpected overdraft and credit card charges or that these credit options will tempt them into long-term debt. Indeed payday loans can be cheaper than running up an unauthorised overdraft.
To improve the payday lending market for consumers, Consumer Focus is calling for:
- The number of loans taken out or rolled over to be limited to five per household annually. Where consumers have ‘rolled over’ or taken out loans a maximum of five times in one year, this should be taken as an indicator of financial difficulty and lenders obliged to direct the borrower to independent debt or money advice.5
- Companies specialising in short term loans should be forced to carry out more stringent checks to ensure people can afford their repayments.
- Payday lenders should share information to avoid people borrowing from multiple lenders simultaneously and develop an industry Code of Practice.
- Banks to provide affordable alternatives for customers needing to take out short-term loans. Greater transparency of bank products and services, such as clearer fee structures and fair charges.
- Alternative affordable credit from social lenders such as credit unions to be further encouraged and promoted by both the financial services industry and the Government.
Consumer Focus advises that consumers should consider all of their credit options before making decisions on which type of loan is best for them, and to seek professional advice if they are concerned about being in debt.
Notes to Editors:
A link to an embargoed copy of the full ‘Keeping the Plates Spinning’ report is here:
- The report uses market data analysed by IRN Consultants Ltd in February 2010. This research also showed the number of loans being taken out by consumers is estimated to have risen sharply from 1.2 million in 2006 to 4.1 million last year.
- As an example, if a payday borrower takes a loan of £300 at a rate of £20 per £100 borrowed, then £360 would be due at the end of the loan (typically a month). If the loan was rolled over for another month, then the borrower would pay a £60 fee, but still owe the principal amount of £300. If the customer rolls the loan over for six months, they would have paid £360 in fees, but still owe the original loan sum of £300. Therefore, if a £300 loan was rolled over for six months it would end up costing £660 in total.
- OFT Review of high-cost credit: Interim research report, December 2009: www.oft.gov.uk/shared_oft/reports/consumer_credit/oft1150.pdf
- Qualitative research and analysis was conducted by Synovate, the market research arm of Aegis Group plc in early 2010. Synovate conducted in-depth face-to-face interviews with 20 borrowers in London, Leeds and Glasgow. They had all taken out a payday loan at least once in the previous 12 months.
- Research from the US indicates that introducing a limit of five payday loans a year should prevent a debt trap scenario being established here.
- Consumer Focus is the independent champion for consumers in the UK. Consumer Focus gives a strong voice for consumers on the issues that matter to them and works to secure a fair deal on their behalf. We operate across the whole of the economy, persuading businesses, public services and policy makers to put consumers at the heart of what they do.
- Following this study, Consumer Focus will be engaging with the Payday lending industry, mainstream financial services providers, Government and regulators to present its findings and recommendations. This will include an industry round-table event planned for the autumn.
- The following organisations may be able to help consumers who are concerned about debt:
National Debtline 0808 808 4000 www.nationaldebtline.co.uk
Citizens Advice Bureau (CAB) www.adviceguide.org.uk or look in the phone book for a local CAB.
A million can't wait for pay day
BBC News, www.bbc.co.uk/news/business-10964043
13 August 2010 Last updated at 23:01 GMT
More than one million people 'take out payday loans'
By Susannah Streeter Business reporter, BBC News
Stephanie Derby's loan ballooned from £400 to £800 in six months
Making money last until the next pay day is an old problem, but now there are plenty of new lenders offering the solution of a payday loan.
The number of people taking one out has quadrupled since 1996 according to the watchdog Consumer Focus.
That is despite some companies charging interest rates of more than 2,500% a year.
The organisation is now calling on the industry to bring in more safeguards to protect vulnerable borrowers.
''Payday loans are a valid form of credit and it's much better for people to take one out rather than go to a loan shark," said Sarah Brooks, head of financial services at Consumer Focus.
"But we do think there needs to be a limit on the number of loans people take out and how many loans they are able to roll over."
Research by Consumer Focus suggests that 1.2 million people are now taking out a payday loan every year, borrowing a total of £1.2bn.
For many people such a loan is a quick and efficient way of getting hold of short-term credit.
If the money is paid back promptly on the next pay day, this type of lending can be cheaper than paying an unauthorised overdraft or a credit card charge.
However, if the loans are rolled over, debts can quickly escalate.
Dressmaker Stephanie Derby from Finsbury Park in London took out a pay day loan after she fell behind on rent and bill payments.
She was already overdrawn and at her limit on her credit cards.
''I didn't feel I had any other option, I had just graduated and all my debts were mounting up, it really was a last resort," she said.
"I borrowed £400 hoping to pay it back a few weeks later but I was unable to.
"Each month it cost another £56 to renew the loan and after six months the initial loan of £400 ended up costing me nearly £800," she explained.
However, the pay day loan industry says when managed properly, many people find this type of lending easy to understand and less risky.
Payday loans are legal but can be very expensive
''There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change," said John Lamidy from the Consumer Finance Association.
"But they find that the short term credit offered by the pay day loans industry does meet their needs.
''We are working with Consumer Focus to find out how serious the problems they identify are and whether they affect lots of people or just a few," he added.
The association is also working with the Consumer Credit Counselling Service (CCCS) to find out how to help borrowers who fall into problems.
The money education charity Credit Action says traditional banks could do more to provide the short term credit people need.
''Banks could offer that kind of money to people by extending their overdrafts for a little bit longer for example,'' said Chris Tapp, director of Credit Action.
"Banks can afford to do that and they are still making millions of pounds of profits so they could do more for their most vulnerable customers."
The British Bankers' Association (BBA) claims its members are already being as flexible as they can.
''They have to make a risk assessment on every lending proposal they receive and quite frankly it does not do any good to lend money out to people if they can't afford to repay it,'' said Brian Capon from the BBA.
Stephanie Derby's dressmaking business is now taking off and she has repaid the loan.
She says she will never take one out again.
But for many other people a payday loan is still the only legal option for short term lending, when money is tight and there is nowhere else to turn.