Crackdown on payday lenders: The endless cycle of debt

One of the largest payday players on the market has taken it square on the chin as the Financial Conduct Authority (FCA) begins to crack down on payday lenders. Some of the payday companies that occupy the largest section of the market have reported losses of up to 37 million pounds in 2014. These are companies that prided themselves on approving loans instantly and with not many questions asked. With the new regulations, this kind of business is a thing of the past. At present, because of the crack down on payday lenders companies have engaged in trying to repair past problems and repair the reputation of payday lenders while gaining acceptance as legitimate members of the financial services industry.

Crack down on payday lenders: Where to go for a loan now?

The crack down on payday lenders begs the million-dollar (or should I say pound?) question, where do those who need a loan go to now? The most obvious answer is that those who cannot get a loan from mainstream credit or payday lenders will have to resort to illegal lenders and loan sharks. However, FCA research shows that only 5 percent of customers who found their application for a payday loan denied actually went ahead and considered a visit to the loan shark.

StepChange debt charity sees payday loans as highly dangerous, and that people are often trapped and fall into a spiral of debt. In 2014, 12000 people out of 75000 who approached the charity for help owed on up to 5 or more payday loans. What usually happens is that people take out a payday loan, find that they can’t pay it back, so they take out a second to pay the first. Similarly, a third loan is taken out to pay the second and so on and so forth. The hole of debt gets deeper and deeper.

What the charity has to say about a post-FCA world where payday is regulated there is a misguided assumption that if people cannot access payday loans, they are going to have to find an alternative form of credit. However, people who are already in financial difficulty do not need a new form of short-term high-interest credit. What is needed is credit that is affordable and sustainable.

Alternative credit post ‘crack down on payday lenders’

So far people, on the whole, have turned to alternative forms of credit to pay off existing credit. Not only is it true for payday loans but also of credit cards and personal loans. It is a lethal trap once paying credit with credit has begun. The charity prescribes early intervention to curb debts from mounting. The government has also recently put forth plans to consult on the possibilities of creating “breathing spaces.” Freezing interest rates and charges on loans for people that have serious debt issues would be one way to break this vicious cycle of lending and borrowing.