Payday loans are supposed to be short term, easy to obtain credit that should be paid back within a month at the most. Hence the name ‘Payday’. Payday lenders offer the public small loans to tide them over until they get their next paycheck. They do charge a hefty interest rate and there are fees and costs involved that make it a very bad idea to see this kind of credit as a long term loan.
Over the last 4 years, payday loans have stepped into the spot light and people are turning to this kind of credit more and more. This led to the ruling that any kind of lender must obtain a consumer credit license from the Office of Fair Trading, OFT. Currently the Financial Conduct Authority (FCA) is working to put regulation together to limit the fees and interest rates charged by payday lenders. The bad publicity around the loan stems from consumers taking out loans when they in actual fact often have no means of paying them back. If the loan rolls-over, that is, goes on for more than a month the interest rates will strangle the borrower. These loans are not designed to be used in the long term.
In 2009, Consumer Focus estimated that 1.2 million people took out 4.1 million payday loans. According to the OFT, approximately 900 million pounds was borrowed in 2008. However, in 2012, the OFT made an interim report that up to 1.8 billion pounds had been lent to consumers. The Public Accounts Committee found that around 2 million people are currently using payday services.
The OFT found that young males, unmarried, living in rented accommodation and earning more than 1000 pounds a month were typical regular payday customers. Research also concludes that borrowers on the whole are not unemployed or without access to a bank account. In actual fact most customers of payday lenders do use the service appropriately, namely as a short term loan that makes more sense than running an overdraft, or having to go to the hassle of trying to get credit out of a stingy bank.
There were 240 payday firms operating in the UK by the end of 2012. Most of the lending was accounted for by the top 50 companies. Other research maintains that there are about 2000 High Street payday shops most of which are national chains. Across the board there are around 72,000 shops in the UK
Payday Loans firms have been under fire for the last 4 years, as the clergy and Politicians rail against their expensive loans and alleged crooked business practices. The OFT, however, concluded in 2010 that payday lenders should not have their interest rates restricted as they provided a necessary service. People who would otherwise use the services of payday lenders and other high interest credit businesses, might end up turning to illegal money lenders, and loan sharks.
The Consumer Finance Association, which represents some of the payday lenders, says that the larger payday companies have come together to sign a code of conduct.
Regardless, it is firmly in the cards that the payday loans sector will be regulated and capped by 2015. It will be interesting to see which way the pendulum swings!