Payday loans are often known by a number of different names such as short-term loans, wage or salary advances and quick loans. This makes standardised definitions difficult and indeed the number of different names shows how the product means different things to different people. Again, none of this is particularly helpful until you look deeper at the fundamentals of this type of credit. The regulator of the sector, the Financial Conduct Authority, otherwise known by the acronym the FCA, uses the term high cost short term credit (or HCSTC if that is a mouthful). This includes payday loans.
The FCA specifically define payday loans as:
Source: FCA Handbook
Prior to the FCA becoming the regulator for the HCSTC industry in April 2014, the sector was regulated by the Office of Fair Trading (OFT). Whilst the OFT was the regulator, the HCSTC market was subject to a number of reviews and consultations. Many of the top lenders, including 247Moneybox, were asked to provide information and input to assist the regulator in developing conduct guidance which went on, in the main, to become part of today's rule book for the FCA.
Also during the time the OFT were the regulators of HCSTC, the industry was referred to the Competition Commission now known as the Competition and Markets Authority. This organisation's remit was to explore whether the market for payday loans was working efficiently and whether there were any barriers to consumers being able to compare and switch between products.
In April 2014, the FCA took over control of consumer credit including HCSTC. At time the Government had the following to say regarding the incoming supervisory body:
To protect consumers, the FCA will:
To see how we ensure our customers are protected visit our Responsible Lending Principles page.
The FCA has been particularly active in the HCSTC market. As a responsible member of that market, we welcome the changes they have introduced not only as a means improving the way the market works for all stakeholders but also to be able to demonstrate how the market has matured and is now being held to a very high standard.
So what have they actually done to achieve this? The answer lies both in tangible actions, such as capping interest rates, and in the intangible, which we will come on to. Arguably the most important change is the way they are shifting the mentality of the industry to a customer centric approach.
Our founding management team came from a banking background and were well used to operating in a FSA (as it was then, the forerunner to the FCA) environment. This environment was a principles based one and when the FCA introduced this regime to HCSTC it was familiar to us but novel to the industry.
Shifting to this may not sound particularly noteworthy but it's this shift of mentality or culture which will ensure that participants eventually don't have to consciously think at each and every step "am I being compliant", they will instinctively put the customer first in their decision making.
The price cap is a very important part of what the regulator has actioned. The box below neatly summarises this:
In addition, some other areas that the FCA has looked at and put in place measures include:
To be able to place payday loans into context with the trillion-pound consumer credit market is useful in seeing its relatively niche use and appeal. Whilst the actual number of borrowers is much higher, reflecting the smaller loan amounts, the actual pound sterling lent, compared to say the credit card market, is relevantly small. We've pulled together some helpful statistics from the Competition and Market Authority and industry trade body, the CFA, to provide this context.
From 2008 to 2013 the market expanded rapidly. At its peak in 2012 approximately 10.2 million payday loans worth £2.8 billion were issued. Since that peak the number of loans issued has dropped quite significantly, with the CFA reporting loans made in the period January to April 2016 were 42% lower than in the period January to April 2013.
According to the CMA, the majority of payday loan customers borrow online with 83% of payday loan customers surveyed having borrowed online. As you would expect there is a degree of overlap, with 12% of customers having used both.
Interesting the CMA found the median net income to be different between online and high street borrowers. The average online customer earned £16,500 per annum, which is close to the wider UK average of £17,500. The average high street customer earned £13,400 a year. In addition, customers of both channels are likely to be male, work full time and live in larger households.
Anecdotal evidence gathered from internal sources corroborate the findings from the CMA in that the biggest reason for borrowing was to fund emergency costs connected to standard living expenses such as a large phone bill. According the CMA the next most popular reason was for car or vehicle related expenses and the third most cited reason was for general shopping or household items.
In common with expectations, the CMA found that borrowing is particularly likely to be on Fridays and are somewhat more likely to be at the beginning and end of the month. This would fit with expectations when overlaid with UK pay cycles. Interestingly, some internal testing has shown that even when delinked from a customer's payday entirely i.e. the customer is given complete free reign to choose the repayment date, they still select their next pay date. This is logical and shows that payday customers are particularly savvy when it comes to smoothing their cashflow.
It will hardly surprise you to learn that the rise of mobile devices across the board is equally reflected in online payday loan applications. Our internal data suggests that almost 91% of applicants now apply using their mobile or tablet. We took the decision in 2013 to totally remodel and fully mobile optimise our website and application process, to improve the customer experience.
The price cap introduced by the FCA doesn't currently apply to bank overdrafts. On the one hand, it may seem surprising that high street banks should have to consider the price cap as, on the face of it, they are not involved in HCSTC. However, consumer magazine Which? studied the costs of high street bank overdrafts and found that when looking at charges for unauthorised borrowing, some banks were charging up to 12.5x the amount of a payday lender.
As far as column inches go, payday loans are up there with the best of them when it comes to courting controversy. This may well be warranted given the findings of numerous studies into the sector, and as with almost all industries connected to credit, there are practices that need to be improved. However, aside from the confusing and inaccurate APR debate, the topic that seems to grab most of the headlines is that payday lenders target vulnerable customers.
Whilst sponsoring premiership football teams and having TV ads on prime-time slots certainly helps build brand awareness, there is an argument to say that this is not driving the growth of the industry. Whilst the ad agencies would like to take the credit, it's more likely to be a more complex mix of macro-economic pressures on household finances coupled with a shift in the way credit is used. It's this latter category that opponents of the industry doesn't seem to want to engage with.
Think of the creative disruption in industries such as music, film and media. It was only a matter of time until the PhDs turned their brain power to the provision of credit. Once it was clear that vast swaths of the population had a demand that not only wasn't being met, but also could be met in a mutually beneficial fashion - well just look at the numbers of payday and connected firms listed in prestigious awards run by Sunday Newspapers and accounting firms.
"247Moneybox.com gets its best thinkers on the case!"
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Ultimately, the alignment of lenders and borrowers is closer than some industry critics think, as responsible lending makes commercial sense. At the root of a responsible lending decision is giving the potential borrower all the facts up front so they can accurately assess whether they can afford to repay the loan or not. Arguably, the payday industry is leading the way in clear and transparent pricing that is simple to understand, both if things go according to plan and crucially, if things don't. Cue comparison to unauthorised overdraft fees, no frills airlines or energy tariffs.
Whilst money lending will always attract criticism, a well-balanced and thoughtful debate based on a representative sample of industry stakeholders - including the silent majority of satisfied customers - is far more likely to result in an efficient market providing a better platform of innovation and outcomes for all.
The confusion around this type of consumer credit has come about for a variety of reasons. Perhaps as result of the series of changes the various regulators have brought in and the shifts in business models of the lenders over the years. Whatever the reason there are more than a few myths which require airing and dispelling. It's important to do this in order to inform the debate. In this age of disinformation and less than accurate statements, it could be argued that certain industry commentators have got the wrong end of the stick so to speak. At best this is unhelpful when potential borrowers are looking for accurate information when making a borrowing decision. At worst, and particularly around the issue of APR and so called excessive charges, it may have driven policy changes.
A standardised way of comparing the cost of borrowing is important. However, to ensure standardisation, the rules laid down by lawmakers make certain assumptions. When borrowing, understanding the APR (or annual percentage rate) provides an indication of the interest rate charged on the amount of loan borrowed. APR is based on the cost of a loan over the entire year, but consider HCSTC loans are by definition, less than 12 months, and many, such as 247Moneybox's, are only until a customer's next payday. So, in short the APR may be confusing when working out how much you need to pay back. Instead, it perhaps might be better to focus on the total cost of credit i.e. the actual costs that a borrower needs to pay, as stipulated by the payday lenders. Whilst understanding the APR is important, it could be said that a total cost of credit is a better way of comparing the costs involved and what is required to be repaid.
By definition a rational borrower would choose the least expensive form of credit that is available to them and fits their borrowing criteria i.e. unsecured or secured, the speed and method of delivery etc. Payday loans are a more expensive form of borrowing when compared to say a loan secured on a house or some other form of security. However, consider that short-term loan applications can often be completed online without sending in documentation (as lenders can search databases to get the necessary underwriting information online), and if approved, funded loans can be sent to a borrower's bank account within hours. If price or the cost of credit is a proxy for risk in that the lender needs to ensure that they can cover the losses associated with borrowers who are unable to repay their loan or fraudulent borrowers, then it would follow that payday loans are a risky form of lending money.
So, if the risk to the lender is increased the cause of that risk is a borrower's propensity and ability to repay. How can a lender assess this? One way is to look at a customer's past performance with respect to the way they have conducted their credit commitments. In the UK, this is available via one of three main credit reference agencies (find out more about lending decisions and the credit checks we do here).
Lenders look at the credit history of a borrower to determine the repayment risk. However, credit history is not the only way of assessing risk so the notion that payday loans are for those with bad or poor credit is not accurate. For example, a person might have only recently moved to the UK or might have just turned 18. When searching the credit file there is obviously not going to be much information there. This is known in the trade as a "thin file". A traditional lender such as a bank is going to make the conservative assumption that a lack of history is a negative and that a prospective borrower needs to prove they are a good risk.
Whilst being a conservative approach, this way of making a borrowing decision is going to exclude large amounts of people that would be perfectly good borrowers. This is where alternative finance, including payday lenders, step in. However, it should be considered that true risk based pricing in HCSTC industry will be an incredibly hard concept to achieve. Overall, to assume that all payday borrowers have a chequered borrowing history is a gross oversimplification.
A common myth doing the rounds with the industry's critics is that payday loans are a last resort option and that anyone can take out a payday loan. This is not the case. Payday loan lenders set strict criteria for who they lend money to. Typically, this means being over the age of 18, employed and earning at least a regular wage or salary. If you're not in a financial position to be able to pay the loan back comfortably, then it's unlikely a loan application will be approved by any payday lender.
Payday loans are different in that they are often repayable over a short period, typically less than a month. The clue is in the title really, as they are designed to bridge you from one payday to the next. While some people choose to dip into their overdraft an alternative is to use a small short-term loan aka a payday loan instead. An instalment loan on the other hand amortises (fancy word for pays down) over a longer period, often several months or even years. These types of loan are for very different purposes such as buying a car or paying for a sofa. It's horses for courses really. If you need any independent help in deciding whether a payday loan is for you then why not visit moneyadviceservice.org.uk.
Complete opposite in fact! Payday loans are there to give you a solution for your occasional short-term money needs. They are not suitable for supporting sustained borrowing over longer periods, nor if you are in financial difficulties. This is important. The cost of payday loans are often higher than other types of loans, such as those requiring you to provide a guarantor, which are payable over a longer period, so if you do require a longer term solution there are other more suitable forms of finance available elsewhere. As with all high cost short-term credit, late repayment can cause you serious money problems.
Being a direct lender means that they have their name on the contract and it's their money transferred to your bank account. Over recent years there has been an explosion in the number of payday loan sites on the internet but on closer inspection they turn out to be firms operating as a broker. Brokers collect your data and then go out to the market and try to match you with a credit provider. Sometimes this crucial bit of information is buried deep on their website which is not really that helpful. Occasionally if a lender is not able to help then they may refer the applicant to another firm who can.
Payday loans or high cost short-term credit from a shop or from an online lender can often be the same. In this digital age where you can control your house hold appliances on your phone it's not really that surprising that there is demand to apply for a loan through one! This isn't a shortcut or any less appropriate than going into a physical store, it's just different. Our habits are changing and we are demanding technology that can help us with our lives. Technology is not an end in itself, it needs to contribute otherwise it has no use.
There are implications for missing or not making a payment of a payday loan. Firstly, lenders often report loan information to credit reference agencies, missing payments could adversely affect your credit rating. This may make it more difficult or expensive to obtain credit in the future. Bear in mind also that payday loan firms may pass your account to a debt collection agency or commence legal proceedings to recover the amount you owe. Fees for failed collection may also apply. Make sure you check your loan contract very carefully for the implications of non-payment. If all of the above gives you some comfort that a payday loan might be right for you, you can apply with us. Note: Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.
Life is sometimes not straight forward and inevitably not everything can go to plan every time. Responsible lenders know this and that's why, when adhering to the rules put in place by the regulator, any borrowers that do experience issues can rely on their lender to act in a positive proactive manner, showing forbearance where appropriate. If debt becomes a worry, there are independent organisations you can ask for advice. Visit www.nationaldebtline.org or www.stepchange.org or for more general money advice visit moneyadviceservice.org.uk.