The customers affected (45,000 of them) will each receive £50 for distress (a piddling amount, surely?) plus any legal fees they have encountered. The regulator in this case is the Financial Conduct Authority (FCA), they cannot however fine Wonga because the offences happened before they started regulating payday loans companies.,It is a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it.,Published today, the document calls for a £450 million levy on the UKs £180 billion consumer credit industry (Thats 0.25%: doesnt sound too draconian Ed.) to create a new generation of not-for-profit affordable lenders based on credit unions, with enough capital to compete with the established payday lenders.,Providing UK credit unions with £450m of capital could help them support over one and a half million loans. The new generation of lenders should charge a maximum of 3% interest a month, or 42.6% APR, the IPPR recommends.
This would allow customers to pay just £3 to borrow £100 for one month. A similar loan with Wonga, whose APR is 5853%, currently costs more than £30.,The IPPR also says the expanded network of affordable lenders should cap the maximum loan at £250 (the average size of current payday loans), limit customers to one loan at a time and stop lenders rolling over loans.,Mat Lawrence, IPPR Research Fellow, said of the recent economic good news: A return to rising living standards will reduce households reliance on debt, but it will not eliminate their need for it.
The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill.,Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.,Now shes a campaigner on the paydays loans issue.
Shed not alone, many financial journalists have been consistently outspoken on the subject, as has the Archbishop of Canterbury. But the TV programme she fronted on Monday was the most powerful message Ive seen about the insidious power of the now-substantial payday loan industry.,Why?
Because shes young and its her age-group that the companies target, because shes a great communicator, because shes had money troubles herself and displayed great empathy with those who were getting sucked into the vicious circle of debt. And because she went out and about interviewing lots of young people who were tempted by the loans as a way to instant parties, and showed us the moving stories of those who had been driven to attempted and actual suicide because of the ballooning debts. Impressive stuff.,Yesterdays big story on the personal finance front was the Governments announcement about capping payday loans.,My first reaction was to look up Simon Read of the Independent, because hes been a leading campaigner for regulation of the payday loans sector.,Q: Will a cap on the loans help people avoid falling into debt problems?,Q: How could payday lenders be more responsible?,A: One option would be to introduce compulsory affordability checks.
Lenders often make greater profits from rolling over loans than from the original deal.,A: The regulators have already announced plans to cut back the number of rollovers allowed and the number of times lenders can try and recover their cash from people’s bank accounts. But their advertising also needs to be restricted.,Payday loan providers have attracted column inches from many writers, including yours truly. Now these firms have been summoned to a “summit” hosted by Government ministers.,The high-cost credit industry (that’s a new term to me) also faces a crackdown on the number of times they can rollover loans, and they may be forced to introduce time-lags, so borrowers dont end up choosing a lender on the basis of how quickly it can get the cash.,This emerged from a Westminster summit yesterday.
Consumer Minister Jo Swinson, who hosted the summit, said there is a need to control the number of loans borrowers are allowed to take out.
She intimated that lenders could be forced to set up a central register of borrowers to cut the practice of multiple loans. One borrower reportedly had 34 different loans at the same time.,Delroy Corinaldi of debt charity Step Change called for all payday loan advertising to carry a health warning that includes information about the risks of using high-cost credit. “In particular, companies must be clear that loans need to be realistic and affordable and are not a way to deal with long-term financial problems,” he said.,The FCA also announced at the summit that a consultation will be launched in September to decide its approach to controlling payday lenders.,How do we ensure that? Anyone contemplating such a risky step should get good and impartial advice about their options, and should take a little time before deciding, instead of being rushed into a decision.
However, these loans are by definition emergency loans: the borrower either has, or thinks they have, no alternative and no time.,I would never recommend payday loans, but banning them or capping rates would remove, or at least limit, a finance source that for some borrowers and some situations might be the only alternative.
More and better advice is probably the answer.,According to the Financial Ombudsman Service (FOS), even higher earners are falling foul of payday lenders nowadays.,Martin James of the FOS – quoted by Holly Thomas in the Sunday Times on 2 June – said that “in some cases, lenders (that’s both payday lenders and mortgage providers – Ed.) were found to be unsympathetic with borrowers on higher earnings, assuming they were not in financial difficulty because of the high value of their homes. Many asset-rich people are cash-poor.”,In cases of payday lenders “assuming they were not in financial difficulty”, that sounds like a good excuse. But I don’t imagine too many people would seek funds from a payday lender unless they were in financial difficulty, even if it were only a temporary cashflow problem. And the lenders must know that.,35 years ago he more or less invented microfinance (or microcredit or microloans, whatever you want to call the idea).
The occasion: Yunus’ brainchild Grameen Bank (the name means “Village Bank”) was about to open its first UK branch, inGlasgow.,Grameen’s loans are for small amounts, they are short-term and unsecured, they tend to be to poorer, non-creditworthy people. In the early days especially, in many cases they were to self-employed women, to get loan sharks off their backs.
However, some critics have said that Grameen also charged high interest rates, and two years ago some microfinance lenders (not Grameen) were shut down by the authorities in the Indian state of Andhra Pradesh.,So naturally I thought I needed to test my opinion. In the past Ive been critical of the UK’s growing “Payday Loans” industry with its very high interest rates, many financial journalists have urged the Government to outlaw them, especially Simon Read in the Independent.
So … was microfinance just a payday loan with the added credibility of a Nobel Laureate / economics professor? Was this just the acceptable face of payday loans?,Shaun Ley: “Should we encourage people to take on debt?” Yunus: “We don’t encourage, but we say if you are stuck, we can help.
Our loans are all for the purpose of income generation. Our aim is to facilitate.”,Ley: “What happened in the Indian state of Andhra Pradesh?” Yunus: “We have no intention of making money from microcredit. Others found this profit source attractive, got backers onboard through an IPO, and were aggressive in promoting loans.
That was a derailment of the original idea.
Making money out of poor people is not a new idea – that’s what loan sharks have been doing for years.”,I appear to be stalking Simon Read of The Independent. If so, thats because payday loans are again in the news and this is a story and a cause he has taken up and because he writes well on the subject.,A million use payday loans to cover rent or mortgage,In the past year alone, almost one in seven of those – i.e. just under one million people – have resorted to payday (i.e. emergency) loans to cover rent or mortgage payments.,The Independent has warned that payday lenders are cashing in on the struggles of millions who are unable to borrow from mainstream lenders and those companies charge interest rates of up to 5,000 per cent.,Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and to eviction or repossession and ultimately homelessness.,I cannot disagree with anything thats been said above. Its a sad state of affairs and Ive no doubt payday loan companies in general are cashing in on the misery, despite what was said by the boss of Wonga to Simon Read and which I reported in an earlier post.
There have been calls for these firms to be outlawed. But for the people who feel they have no alternative, what will they do if that happens?,Anyone in debt crisis who consults an adviser at one of the debt charities such Citizens Advice or National Debtline or CCCS, here in the UK would probably be told to avoid payday loans.
But I wonder how many of the million people mentioned in Shelters report have actually talked to such an adviser.
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