9 October 2017
Payday lender, 247Moneybox.com, was established in central London in early 2009 and has seen the maturation of the payday loan industry. Here they set out their views on some common myths surrounding the industry.
Payday loans are known under many names be that short-term loans, quick loans, cash loans or online loans but a catch all term that has cropped up in the last few years is high cost short term credit or HCSTC for short. Not the easiest acronym to remember but it is very distinctive and once understood it's hard to forget. The term is a good one as it doesn't pin the definition down too specifically but describes the product or products which have come about serving largely the same target market. This broader definition helps to encompass single instalment loans aka payday loans taken by borrowers to bridge them till their next payday and also instalment loans, characterised by more than one repayment.
That is all well and good but what is the common ground between those two types of product which means they can be grouped under this nice and tidy heading? Well that is a good question as on the face of it they look very distinct. One has a term of approximately 30 days the other anything up to 12 months. Well what the definition of HCSTC is aiming at is credit that is high cost, defined as greater than 100% APR and short term in nature, which in this case means substantially repaid in less than 12 months. As you can see both these, on the face of it, distinct products fit into this definition.
With a definition that some would say is fairly broad it is perhaps not surprising that a number of myths or common inaccuracies crop up from time to time. These myths can easily be perpetuated as fact and once they gain credibility, often derived from the source pushing the myth, they can be incredibly hard to counter. It doesn't take a genius to see some recent electoral performances benefitting from this phenomenon.
As a responsible payday lender who has been in the market since 2009, we've seen quite a few myths being peddled, some fall away and others persist particularly if they help reinforce an entrenched position or opinion. The fact that these can come from credible and reliable sources is sometimes a source of frustration.
In this media article we want to put out there our version of events to counter some of the more common myths and hopefully set the record straight in some people's minds.
The concept of lending in the short term is not a new one and by that we mean it's hundreds of years old. Just look to the USA in the 1800s for evidence. The need sprung up as work was patchy and most people found it difficult to get bank accounts and overdrafts were almost unheard of. Alongside pawnbroking and cheque cashing, short-term loans were vital in helping millions stay solvent in hard times.
It is perhaps understandable that this particular myth has sprung up and continued to do the rounds. All consumer credit firms in the UK must display the annual percentage rate or APR prominently in their pre-contractual literature, on certain financial promotions etc. The idea behind the APR is to provide a common measure as a comparison tool, so prospective borrowers can rate different forms of credit. This is not just rating a loan against another loan but also a credit card versus a secured loan versus an unsecured loan and so on. Great stuff we hear you say, however when loans of less than 12 months are thrown into the mix this is when the APR can become distorted. The effect of shortening the term to a matter of days can cause the APR to balloon into the thousands. However, when looking at the actual daily cost of borrowing from an HCSTC lender it is a myth to say that it is thousands of times more expensive.
This myth has come from loan shark type shock stories where a borrower borrowed £100 and was never able to close the loan but repaid over a £1000 in interest and charges. Since the FCA price cap rules came into play a lender can:
With all this in mind it is not only irresponsible to lend to a borrower who can't repay but it also doesn't make commercial sense either!
Prior to the FCA becoming the regulator of the HCSTC market the OFT was the regulator for any firm wishing to engage in consumer credit. Since the FCA has become the new regulator in 2014, a lot of the previous guidance and best practice have become rules. These rules are not suggestions and are backed under law. Lenders must comply or face dire consequences.
As we've seen the FCA and indeed the Consumer Credit Act 1974 require certain disclosures including all fees and charges to be disclosed in a transparent manner upfront to a customer at the application stage. To add to this there is a document that all European consumer credit firms must disclose before showing a borrower a contract called a Standard European Consumer Credit Information document. Alongside this, lenders must show borrowers a representative APR and an example when certain trigger situations are met.
This myth comes about from attempting to categorise complaint statistics or debit charity enquiries. Borrowers who require the use of a debt charity are by definition susceptible to some form of detriment due to their personal circumstances otherwise they wouldn't be using the firm's services. To look at an output and assume that this is a result of desired input is a gross oversimplification.
The bad press that payday loans and payday lenders have had has been justified in some cases. In such a sensitive area as money lending it is always bound to split opinion. Following on from the 2008 global banking crisis, not one form of banking escaped public scorn (and quite rightly in a lot of cases). As a result, it is unsurprising that it is a commonly held belief of the one-sided reward structure in the HCSTC industry. In reality, if both parties are approaching the transaction in good faith then both the lender and the borrower benefit. The latter is able to obtain emergency funding which can be repaid with ease and the lender is adequately and sustainably compensated through that repayment.
A common criticism levelled at the HCSTC industry is that it uses threatening and strong-arm tactics to recover unpaid debts. As a regulated industry there are very strict rules on what a company can do to recover regulated consumer credit. Payday loan firms must adhere to these rules. To further dispel the myth, it is worth considering that the relatively small balance of a payday loan would prohibit the general use of expensive collection techniques such as bailiffs. Given this natural commercial constraint it is not surprising that you find lenders in the industry are at the cutting edge of technology led collection techniques. These collection techniques can include the deployment of intuitive chat bots and other AI to do a lot of the heavy lifting when it comes to collections. However, technology will only get you so far. At the end of the day human interaction is the most suitable way to talk through a bespoke issue and come to a mutually agreeable and sustainable solution. Where ever possible lenders will point to free debt advice (free to the consumer). Given the large numbers of customers a payday lender has relative to the book size (i.e. the amount of credit outstanding as a business), it is not surprising that customer experiences drive many operational decisions. At 247Moneybox.com we have a whole team dedicated to promoting the best customer outcomes.
People choose to use credit for loads of different reasons. However, there are some common steps that we should all look at before we even start the process of applying:
It is worth looking at what a lender will typically ask you to have to hand before you apply for any form of credit:
With such a sensitive topic there will always be a spectrum of opinions. This is expected in a fair, open democracy. However, it is important that those opinions are formed based on fact. An informed debate is a fair debate.