Payday lenders in the UK that offer small, short term or emergency loans to individuals with complicated credit ratings, sometimes until the next payday, as the name suggest, have become increasingly criticized in the UK. As reported by The Guardian recently a session was held in Parliament attended by both lenders as well as government institutions probing issues as a result of press coverage. The questions and answers revolved mostly around issues related to
a) Affordability checks
b) Interest Rates both monthly and annually
Affordability Checks for payday loans:
Asked about loan affordability checks Henry Raine, head of regulatory and legal affairs at Wonga, a well-known payday lender in the UK, explained on that occasion that their affordability checks ‘compared favourably’ with credit card companies and banks. Regarding affordability checks, Caroline Walton of The Money Shop says: ‘Someone comes into the store, you’ve never seen them before….’ hinting at the difficulty with background and affordability checks and that payday lenders, perhaps not always having insurance coverage as banks and credit unions might have, safeguard themselves from defaulting borrowers by their relatively high interest rates.
High Interest Rates from payday lenders
Caroline Walton, too, is fed up with all the bad rap payday lenders get: ‘Every one has a shocking story to tell about a payday lender, even my taxi driver.’ She continues: ‘… you’ve got to invest in all the security, train your staff and yet £29.99 is seen as profiteering.’ This is a lower rate than the rate of £37.15 charged by Wonga, another well-known payday lender, who could report an annual profit of £84.5 mill. The argument used by all payday lenders is that they are justified in charging these rates, due to the high risk in default on their loans.
According to Jane Symonds, if people with a reliable credit history have to lend money, they should do so from a credit union. Credit unions charge lower rates. The London Mutual Credit Union charges only £11.00 plus a £2.00 membership fee. However, they also set their own requirements, one being a reliable credit history. Again the LMCU further requires their borrowers have to live in London boroughs of Southwark, Lambeth, Westminster or Cambden. Alternatively, borrowers have to first invest with them before they can apply for a loan. This might not suit everybody. Some people choose to take a payday loan for personal reasons, occasionally trivial reasons or as a loan during a crisis, believing they cannot afford the waiting period for their application to be approved or they know their credit rating will not allow them a loan at a more formal institution.
Urban Myths about payday lenders
Again Caroline Walton dismisses as an urban myth some of the horror stories told about payday lenders. ‘My wife’s uncle borrowed £500.00 to repair his car, and now he owes them £16,000.00. It has totally ruined him’, as told to a BBC reporter by his taxi driver. The CFA, the Financial Conduct Authority, which lenders should become a member of when making a loan, prescribe a lending code, that includes:
- a proper affordability check
- a maximum of three roll-overs or loan extensions
- interest charges frozen after 60 days
Payday lenders not adhering to prescribed principles have been singled out and told to improve. As a result 19 out of a total of 200 have left the market and three have actually had their credit licenses revoked.
Hence, Caroline Walton maintains she is not worried about how her company makes its income. She sleeps well at night.
Web content writing for websites by Lyn Gunell