There’s no argument that reducing payday lending is positive, but it’s also a long game with non-compliance fines and license revocations having been issued by regulators for years.
In 2014 the Citizens Advice Bureau called for stronger consumer protections, and the Financial Conduct Authority began policing payday loans the same year. It also introduced price caps in January 2015 to set maximum borrowing limits.
However, fast forward three years and The Guardian reported a 22% surge in complaints, with about 200 cases filed a week.
So, in a post-pandemic world, with further scrutiny of payday loans, how successful are the consumer protections in place, and why do credit unions need to step up to the plate?
What Are the Rules on Payday Lending?
Payday loans were originally pioneered by fintech like Wonga, one of the original credit providers that offered short-term loans to help tide people over until they were paid.
The issue with this original format of payday lending was that the cost to consumers was too high and loan terms were too short – if the borrower can’t make the repayments, or becomes reliant on high-interest loans, the costs can spiral.
Reforms happened globally to evolve the payday loan product into something safer and sustainable. For example, UK law changes mean that there are now limits on the charges levied:
- You cannot be charged more than £24 per £100 borrowed in monthly fees.
- Default charges for late payments are capped at £15 plus interest.
- Overall limits restrict the total repayment to double the original loan value.
Even with caps in place, and the continuing clampdown, the same risks apply and payday lending is still a knee jerk solution to a wide range of financial pressures. A common solution is for a borrower to go for a rollover loan if they can’t pay the debt on time – a lender can offer this twice.
Still, if the borrower doesn’t read the mandatory information sheet or take up free debt advice offered, they can still end up in a spiraling debt pattern.
Are Credit Unions a Viable Alternative Borrowing Source?
Credit unions work like conventional banks, but they’re co-operatives owned by their members and don’t exist to make a profit.
We investigated current terms and interest rates available from some of the larger credit unions.
|Credit Union||Loan Value||Term||Interest Rate||Repayment||Total Cost|
|London Capital||£500||Six months||26.8%||£89/month||£534|
|National Fire Savers||£500||Six months||26.8%||£89.26/month||£535.56|
|Lewisham Plus||£500||Six months||26.8%||£89.26/month||£535.56|
|Eastern Savings & Loans||£500||24 weeks||42.6%||£21.05/week||£547.30|
So far, so good, and relatively modest repayment values of up to £47.30 against a £500 loan.
There are, however, several problems here.
The Issue With Credit Union Loans as a Payday Borrowing Solution
First, you need to be a credit union member to apply for a loan – that means needing internet access and a computer.
Those tools aren’t always available, and may pose a steep barrier to access. Next, while these illustrative interest rates aren’t necessarily excessive, credit unions often go right up to the government limits set in the December 2020 Interest Rate Review.
A credit union can charge up to 42.6% APR (in stark contrast to the caps on payday lenders), and we can see in this snapshot that one in four are charging as much as they are legally permitted.
However, the biggest challenge isn’t so much the rates or the fees but the lack of accessibility:
- There are around 500 UK credit unions per ICTSD, so one lender per 134,440 potential applicants.
- The most recent Bank of England stats show that, although membership has increased, only 1.92 million people are credit union members (about 2.9%).
- A high proportion of the population doesn’t know that credit unions exist, what they do, how they can apply, or whether they’d be eligible – assuming high street banks with strict eligibility terms or payday lenders are the only option.
Expanding the credit union sector would solve most of these issues in one swoop, allowing people access to affordable, trustworthy loans with manageable repayments and limited interest costs.
The Office for National Statistics found that 87% of British adults have seen increases in living costs, necessitating a far broader scale of safe lending.
It is a known fact that low-income families spend a higher percentage of their income on basics like food and energy, and are less likely to engage with mainstream lending providers.
We need affordable borrowing to be scaled upward in a tangible way, coupled with government support schemes to help the most vulnerable borrowers find safe financial support when they need it most.
Caps on high-interest loans and payday loan restrictions are welcome, but they do little to stem the tide of growing debt when the most suitable alternative simply isn’t large enough to address.
And, while payday lenders are still there to fill in this gap in the market, the outcome is inevitable.