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You can find the current article at its original source at http://www.guardian.co.uk/money/blog/2013/jun/27/payday-loans-industry-law-unto-itself
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| Payday loans: reining in an industry that is a law unto itself | Payday loans: reining in an industry that is a law unto itself |
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| The Office of Fair Trading's decision to refer the payday loan industry to the Competition Commission has put the spotlight firmly on this type of credit and its impact on borrowers. | The Office of Fair Trading's decision to refer the payday loan industry to the Competition Commission has put the spotlight firmly on this type of credit and its impact on borrowers. |
| So it should be, because what was until a few years ago a relatively unknown form of lending is now a £2bn industry, and almost one in five people with debt problems are now struggling with payday loans. | So it should be, because what was until a few years ago a relatively unknown form of lending is now a £2bn industry, and almost one in five people with debt problems are now struggling with payday loans. |
| As it has grown, so has the number of people contacting StepChange for help with payday loans: in 2012 we heard from 36,413 people, more than twice as many as in 2011. The average amount owed on payday loans has increased by £400 over the same period to £1,657, showing the severity of the problem – people now owe more on payday loans than a whole month's income. Many of these people have multiple payday loans, with one couple seeking our help having 36 loans between them. | As it has grown, so has the number of people contacting StepChange for help with payday loans: in 2012 we heard from 36,413 people, more than twice as many as in 2011. The average amount owed on payday loans has increased by £400 over the same period to £1,657, showing the severity of the problem – people now owe more on payday loans than a whole month's income. Many of these people have multiple payday loans, with one couple seeking our help having 36 loans between them. |
| The scale of repayment problems – as many as 2.7m loans could not be paid back on time in 2012 – shows that serious failings by payday lenders are causing vulnerable borrowers to fall into a vicious cycle of long-term debt. | The scale of repayment problems – as many as 2.7m loans could not be paid back on time in 2012 – shows that serious failings by payday lenders are causing vulnerable borrowers to fall into a vicious cycle of long-term debt. |
| There are a range of practices we are concerned about. These include poor lending checks, where payday lenders are failing to properly assess whether applicants for a loan have enough disposable income to repay the loan to term in full; another is rollover, where payday lenders are renewing loans without checking whether they will be affordable, even though a failure to pay off the loan as planned is a clear warning sign that a borrower could be experiencing financial difficulties. | There are a range of practices we are concerned about. These include poor lending checks, where payday lenders are failing to properly assess whether applicants for a loan have enough disposable income to repay the loan to term in full; another is rollover, where payday lenders are renewing loans without checking whether they will be affordable, even though a failure to pay off the loan as planned is a clear warning sign that a borrower could be experiencing financial difficulties. |
| There is no doubt that the presence and growth of payday loans suggests there are significant pressures on household finances, therefore more work needs to be done to encourage cheaper alternatives such as credit unions. | There is no doubt that the presence and growth of payday loans suggests there are significant pressures on household finances, therefore more work needs to be done to encourage cheaper alternatives such as credit unions. |
| The current regulatory regime for consumer credit has not adequately protected large numbers of borrowers. The OFT has often been constrained by a lack of effective powers and resources. Its recent review of compliance in the payday loans sector confirms that large swathes of regulatory guidance have effectively been ignored by an industry which seems to have become a law unto itself. | The current regulatory regime for consumer credit has not adequately protected large numbers of borrowers. The OFT has often been constrained by a lack of effective powers and resources. Its recent review of compliance in the payday loans sector confirms that large swathes of regulatory guidance have effectively been ignored by an industry which seems to have become a law unto itself. |
| Regulation of payday loans passes to the Financial Conduct Authority (FCA) in April 2014. One of the key parts of the FCA's toolkit is its ability to tackle specific product features causing consumers harm. This is a vital power for the regulator to make sure markets work well for consumers, so that it is able to meet its statutory objectives. Many of the problems we at StepChange see could be effectively dealt with through the exercise of these new powers. | Regulation of payday loans passes to the Financial Conduct Authority (FCA) in April 2014. One of the key parts of the FCA's toolkit is its ability to tackle specific product features causing consumers harm. This is a vital power for the regulator to make sure markets work well for consumers, so that it is able to meet its statutory objectives. Many of the problems we at StepChange see could be effectively dealt with through the exercise of these new powers. |
| This could be a cap on rollover to stop unaffordable loans from spiralling out of control. Another measure could be a limit on the number of payday loans a borrower can take out over a given period, starting at a maximum of four 30-day loans over 12 months. A payday loan debt ceiling, so that maximum loan values do not exceed £500 or some other appropriate limit such as 25% of income, would prevent people from borrowing more than they repay. | This could be a cap on rollover to stop unaffordable loans from spiralling out of control. Another measure could be a limit on the number of payday loans a borrower can take out over a given period, starting at a maximum of four 30-day loans over 12 months. A payday loan debt ceiling, so that maximum loan values do not exceed £500 or some other appropriate limit such as 25% of income, would prevent people from borrowing more than they repay. |
| Cooling off periods between loans would stop loans being rolled over by the back door, while a limit on default interest and charges would stop small debts being inflated excessively. There should be measures put in place to prevent borrowers from holding more than one payday loan at any one time. Crucially, there should be a minimum 30-day grace period for borrowers in financial difficulty, where additional interest and charges are frozen while borrowers get help to deal with their debts. | Cooling off periods between loans would stop loans being rolled over by the back door, while a limit on default interest and charges would stop small debts being inflated excessively. There should be measures put in place to prevent borrowers from holding more than one payday loan at any one time. Crucially, there should be a minimum 30-day grace period for borrowers in financial difficulty, where additional interest and charges are frozen while borrowers get help to deal with their debts. |
| In the meantime, payday lenders must not get a free ride in the period before regulation passes to the FCA. The OFT needs to use all the powers at its disposal to make sure firms do not break the rules and are stopped from trading if they do. Politicians, regulators and the payday lending industry need to come together and act to prevent further harm to consumers. The Department for Business Innovation and Skill's summit on Monday will provide a welcome opportunity to make sure this happens. | In the meantime, payday lenders must not get a free ride in the period before regulation passes to the FCA. The OFT needs to use all the powers at its disposal to make sure firms do not break the rules and are stopped from trading if they do. Politicians, regulators and the payday lending industry need to come together and act to prevent further harm to consumers. The Department for Business Innovation and Skill's summit on Monday will provide a welcome opportunity to make sure this happens. |
| The OFT's decision is to be welcomed – all too often payday loan borrowers are making decisions under extreme financial pressure, competition is not delivering effective outcomes for consumers, and nor is it protecting them from poor practice that is endemic in the sector. | The OFT's decision is to be welcomed – all too often payday loan borrowers are making decisions under extreme financial pressure, competition is not delivering effective outcomes for consumers, and nor is it protecting them from poor practice that is endemic in the sector. |
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