Kevin Paterson is sales and marketing director at Assurant Intermediary
As financial institutions have tightened their criteria to meet Solvency II requirements, cheap and sub-prime loans have become a thing of the past. Despite financial regulation in the UK this has created an opportunity for some companies to take advantage of vulnerable people who feel they have nowhere else to turn. It appears that the truism remains that people will behave as badly as you let them.
Last month the Office of Fair Trading launched an investigation into the practice of payday loans. MPs have this week waded into the debate and have published a report outlining their fears about the rise in these organisations.
Let me paint a picture. Payday lending is a £2bn industry in the UK today. These lenders make unsecured loans, typically in amounts less than £500 though some can go as high as £1500. There are virtually no credit or background checks involved, so loans are made to just about anyone who walks in the door. The loans are scheduled for anywhere between 2 and 30 days, with repayment due at the end of the month on pay day - hence the term ‘payday loans.’ It’s not uncommon for interest rates on these loans to be around 2,000 percent APR, and they can go as high as a whopping 4,200%.
It is quite unbelievable that these terms and interest rates go unchecked in a country that prides itself on gold-plated regulation.
Research by the OFT carried out in 2010 shows that the average income of someone taking out a payday loan was £18,000pa with one in ten below £11,000pa. The vast majority of these individuals are between 18-30 years of age.
Payday lenders typically operate through the customer’s debit card which means that the agreement cannot be cancelled and the lender is able to take repayments directly from the customer’s account. Most operate purely by email, making it difficult to contact a representative in person.
Further to a study conducted by Consumer Focus during August 2010, payday lenders in the U.S. have been a cause for concern for many years. The practice is now banned in 13 states and tightly regulated in 37 states. In Australia two of the largest states have imposed a 48% APR cap and Canada has gone a step further by making any APR above 60% illegal. The recent expansion of payday lenders into the UK has been driven by U.S.-based payday lenders, who see light-touch regulation and a struggling economy as a huge investment opportunity.
Tactics such as bombarding late borrowers with harassing calls or sending emails threatening penalty charges, court action and bailiffs are all too common. Punitive fines and charges rack up at a frightening rate.
These firms are filling the void left by the banks and sub-prime lender who have severely tightened their lending criteria during the recession. They operate a numbers game and what some may describe as inadequate regulation allows these firms to operate in the financial equivalent of the Wild West, making huge profits at the expense of vulnerable borrowers.