Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

10 Danger! Payday lenders

In this video Hugh Stickland, Chief Economist of Citizens Advice, talks about trends in enquiries from people in difficulty with payday loans and asks whether the new rules of the Financial Conduct Authority (FCA) are helping consumers.

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Hugh, payday lenders have been much in the news in the last few years. And, I guess, people who've taken out a payday loan and have got into a problem will be many of the people who you've seen and had to deal with here at Citizens Advice.
Yes, absolutely. From the financial crash and the recession onwards, we saw a real spike in people coming to us with payday loan problems. And they were very, very serious problems as well - people being left with no money, the payday lender draining their bank account straightaway, harassment for payments - very aggressive debt collection practises. And, of course, the cost of the loan, as well, was monumental. We're talking APRs of well over 1,000 per cent - sometimes 3,000 per cent or so. So it left people high and dry without a hope and scared as well. It was really, really harrowing to see some of those cases.
Hugh, the FCA, as we know, has taken over regulation of the payday lenders. And I'm guessing that with their new regulations about interest charges and the way in which the payday lenders must go about their business must be reducing the number of inquiries which you're getting.
Well, let's start with the numbers because it tells a really compelling picture. Over the last year, we have seen roughly the numbers of people coming to us with payday loan issues half compared to the time before the FCA regulations and before the cap on the cost of interest. That's testament to the FCA regulations. We really support them. We think they're working well. We're still gathering evidence, and we will be presenting any further evidence that we find to the industry and the FCA to see if they do need to be tightened up. But so far, we think there's been a big improvement.
But I have to ask Hugh, is there a problem, in that, people who are now denied access to payday loans because of the new regulations, are just going to fall into the hands of unregulated lenders and then get into worse problems than they would have done in the first place?
This is precisely one of the things that we need to watch for. And that's what we're doing - working with people like the Illegal Money Lending Team in National Trading Standards. Now, at the moment, our evidence suggests that people are actually falling into arrears with things like their energy bill. So they would have taken a payday loan to pay their energy bill or perhaps their council tax. Now, in some ways that's quite difficult because these are now priority debts that the person is dealing with.
But in other ways, it's usually much more easy for us as an advice giver to deal with the energy company, or the water company, or the council tax department than it is to deal with a payday lender. And there's more forbearance, there's more understanding in that market. So it's something that we continually need to look at, continually need to watch. But so far we think this is better for consumers.
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Payday lenders are an alternative source of credit that have emerged in recent years. Lately, their business practices have come under fire and attracted great interest in the media and with regulators.

They are criticised for charging extortionate rates of interest on short-term loans and for dubious lending practices.

Tighter regulations on the way the payday lenders do business were introduced in 2015. This includes a 0.8% per day cap on interest charged. Additionally, no one now has to pay back more than twice the sum borrowed (the aggregate interest charge is capped at 100% of the loan).

The Archbishop of Canterbury, Justin Welby, has gone on record as wanting to help credit unions take on payday lenders and force them out of business. There are over 350 credit unions in the UK who collectively lend around £700 million – these are small mutual organisations often linked to places of work or particular localities that lend money from pooled savings.

So should payday lenders be forced out of business? Should their business be redirected to the credit unions?

While credit unions represent a lower cost alternative to borrowing, the scale of the funds they have available is insufficient to replace the lending being done by the payday lenders. Additionally, credit unions generally take a little longer to approve loans and this might be prohibitive for customers who need immediate cash. The harsh reality is that without payday lenders, many of their would-be customers could fall into the hands of the unregulated ‘loan sharks’.

While certain of the practices of the payday lenders might be condemned, their very existence and proliferation in recent years highlight both the current problem of falling living standards for many families and the underlying issue of financial exclusion from mainstream financial services for thousands of households in the UK.

Activity 6 The effect on your credit rating?

Timing: Allow about 5 minutes

What do you think will be the impact on your credit rating of getting a payday loan?

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The impact is likely to be adverse. It indicates that you might have no access to other, cheaper, forms of borrowing and is suggestive that you have poor financial management skills. For some lenders it is a ‘knock-out blow’ if they discover from your credit history that you’ve applied to them for a loan or a mortgage.


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