Please welcome Andrew Dobson to the blog! Andrew is a recent graduate of the London School of Economics who is now plying his trade as a finance writer and freelance blogger for some of the UK’s most authoritative websites.
He might be one of the payday lenders’ fiercest critics, but the Archbishop of Canterbury, Justin Welby, has warned against the eradication of the payday loans industry. Despite a new clampdown on payday lenders, introduced on July 1, the Archbishop believes the total removal of payday lenders would create a dangerous ‘gap in the market’ which would inevitably be filled by predatory and criminal loan sharks.
Although the payday loan industry has been much maligned since it burst onto the scene almost a decade ago, lenders like Wonga offer a service that two million British consumers use every year. Critics of the industry are quick to cast judgement on the industry, but with precious few alternatives available, it is clear that the existence of the payday lenders is preferable to their abolition.
The service provided by short term lenders
Recent research conducted by the Competition Commission has shed light on the typical payday loan usage. The research found that the average payday loan repayment period is just 22 days, and two-thirds of all loans are either repaid on time, or early.
A snapshot of the archetypal payday loan customer revealed that borrowers are, statistically speaking, 35 year old males, living with their children and earning less than $25,000, usually in areas where incomes are relatively low.
The average borrowing amount is $260, and 60 percent of borrowers believe access to such loans is something they could not manage without. The majority of payday loans pay for food and utility bills, while four percent admitted to using a payday loan to meet their mortgage or living costs. 70 percent of borrowers said their payday loan usage was linked to a recent change in their financial circumstances.
Financial Conduct Authority clampdown
On 1 July, the Financial Conduct Authority (FCA), which has taken over the job of regulating the payday loan industry from the Office of Fair Trading (OFT), introduced tough new rules which force lenders to place ‘risk warnings’ on television and print advertisements.
Further regulations stipulate that lenders have been banned from rolling over loans more than twice. They must also make checks to ensure prospective borrowers can afford to repay loans before they are granted.
A cautionary note from Justin Welby
The Archbishop of Canterbury is one of the staunchest critics of payday lenders, yet he believes closing down the industry altogether would be a step too far, exposing those who are struggling to make ends meet to less favorable alternatives.
In a lecture delivered at Westminster earlier this month, the Archbishop warned that putting firms out of business would only make matters worse, putting vulnerable people at the mercy of criminal loan sharks.
He said: “Of course I am concerned – and this has a lot to do with the future of the City, the future of the financial services industry in this country – that if you knock payday lenders on the head before there is a viable alternative, in many parts of the country, the only place people can go is loan sharks.
“Payday lenders are perfectly legal and overseen. They do not send people round with baseball bats. One of the worries at the moment is if payday lending declines very rapidly and credit unions do not take up the slack, then will people turn? There is a danger of a gap in the market.”
Some alternatives do exist
A recent survey of its customers by the lender Wonga has shown that viable alternatives do exist for many of its customers who still choose to access a payday loan. Their research found that 77 percent of customers have access to other forms of short-term credit, such as credit cards and bank overdrafts. So, perhaps payday loans aren’t the last ditch credit option for households with no alternative after all.
Do you think there would be a gap in the market without the presence payday lenders? Would you ever choose to use a payday loan if you had access to an alternative source of short-term credit? We’d love to hear from you, so please leave your thoughts in the comments section below.
