Payday Loans – Is money really the root of all evil?

Initially originating from the USA, the ethics surrounding pay day loans have certainly been under scrutiny – but more particularly since 2015 when the Financial Conduct Authority massively clamped down on what were referred to as “Wonga-style” loans.

So what exactly is a “payday” loan?

Payday loans are exactly what the name suggests.  They’re typically a low value amount loan (ordinarily up to £500.00) and are then repaid within a month – or on the borrower’s next ‘pay day’.  Of course, they also come at a price and with a typical payday loan costing as much as £25.00 for every £100.00 borrowed they’re certainly not for the faint-hearted.  In fact, many lenders will charge a typical APR of anything between 1,355% and 2,225% – not to mention their standard broker fees.

The market has previously been dominated by three key players – Wonga, Dollar Financial and CashEuro Net.  However, Wonga recently a reported a revenue loss of some 64% last year whilst Dollar Financial have been forced to sell “Money Shop” and CashEuroNet has been massively stung by regulatory fines.  So in real terms, there are no winners.

How are payday loans regulated?

The Financial Conduct Authority is responsible for regulating all lenders across the UK and under the Consumer Credit Act 1974 all lenders are legally required to have a licence from the Office of Fair Trading.

What’s more, the Consumer Credit (Advertisements) Regulations 2004 also lay down the requirements surrounding the way within which payday loans are advertised.  This means that the “typical APR” must clearly be stated in adverts and that potential borrowers are made fully aware of the agreement they’re intending to enter into.

The Consumer Credit Act 2006 also specifically requires the Office of Fair Trading to consider irresponsible lending so, although there are currently no restrictions on the amount of interest payday loan companies can charge, the Financial Conduct Authority have now imposed a cap with a view to preventing consumers from getting into further debt.

That said, just two years after the cap was first introduced, leading debt charities and associated industry groups have already been forced to consider the negative impact this has had.  In fact, whilst welcoming the initiative, Jane Tully from the Money Advice Trust was quick to point out that: “You can regulate away the supply but you can’t regulate away the demand.”

What this essentially means is that the need to lend is still very much evident and the cap has only served to push borrowers into a different direction as opposed to alleviating the issue altogether.

Recent criticisms

With the industry already under massive scrutiny there have also been some specific incidents leading to further speculation over payday loan ethics.

In 2013, payday broker Cash Lady were slammed over their decision to use Kerry Katana as part of their marketing campaign.  Hardly surprising given that, by then, she was already being declared bankrupt for the second time yet all at a time when the company were promoting “Fast Cash for Last Lives.”

A year later, 247 Moneybox were also penalised for using excessive default fees with a view to cutting their headline rates of interest.  Whilst these fees were previously averaging £25.00 (or above), the Financial Conduct Authority have now capped default fees to no more than £15.00 per missed payment, with the amount a borrower is liable to repay not to exceed 100% of the initial amount loaned, inclusive of fees and interest.

More latterly, only last year, Wonga were awarded with the “Worst Consumer Credit Provider” at the Consumer Credit Awards – and perhaps not surprisingly so.  Not only have Wonga faced widespread criticism over their extortionate interest rates and unethical collection methods but they also entered into a £24 million shirt sponsorship deal with Newcastle United football club, leading to much controversy over whether this “promoted” the idea of getting into debt to younger fans of the club.  Although legislation dictates that under 18’s can’t apply for loans, the Wonga’s automated system was also targeted by identity theft and enabled minors to apply for their 4,214% APR loans.  Hardly the image any reputable club would want to promote, surely?

So what is the likely impact of deregulating pay day loans?

The harsh reality is that, in today’s economic climate, more and more people are struggling to pay everyday bills; hence the tendency to rely on payday loans for essential spends such as food and utility bills, despite the added cost of doing so.

One of the UK’s leading debt charities, StepChange, has in fact identified that some 40% of their clients miss a bill payment or are forced to take out other short-term credit solutions if they’re turned down for a payday loan.  So, although the Financial Conduct Authority have seemingly acted in the consumer’s best interest, consideration now needs to be given as to where consumers can turn when faced with a financial crisis.

The obvious “solution” – if ever it could be called that – is that consumers will now be more likely to rely on pawn brokers, logbook loans and unauthorised overdrafts as a means of getting by and making ends meet.  In the meantime, there’s an increasing market presence for companies such as Brighthouse, PerfectHome and Buy as you View; all of whom offer rent-to-own loans on household goods such as televisions, settees and white goods.  But yet again, their typical APR is around 70%.  It’s a vicious circle.

In direct response to obvious concerns from the likes of the Financial Services Consumer Panel and associated industry groups, the Financial Conduct Authority now intend to finalise it’s ‘post-cap’ policy in the summer but the end result, it has to be said, certainly remains to be seen.

Credit Scores? Improve Yours Using Our Top Tips

How to improve your credit score

If you’re intending to apply for credit – for whatever reason – then it’s imperative that you have a good credit score since lenders will use this information to decide whether or not you’re ‘creditworthy’.

What is a ‘credit score’?

Your credit score is made up of certain information retained by credit reference agencies, such as Experian and Equifax.

If you apply for credit, the lender will look at your credit score to ascertain whether you have an adverse or poor credit rating – for example, if you’ve defaulted on previous arrangements with other lenders.  If they identify this from your credit record then they’re unlikely to extend credit to you; hence why it’s really important to keep this information up-to-date.

What does a poor credit score mean?

A poor credit score will tell the lender that you’re not a responsible borrower.  It might also mean that you have a County Court Judgment registered against you.  These stay on record for a period of six years and can make it extremely difficult for you to obtain credit during that time.

If you get a County Court Judgment issued in your name then, if you’re able to, make payment in full within 28 days and then apply for a Certificate of Satisfaction from the Court.  This means that the CCJ will be removed from your record and won’t have an adverse effect on your credit file.

If you’ve already got a poor credit score then you might well be limited in terms of who will lend to you (although remember that many lenders may simply decline your application outright).  That said, some lenders might offer credit but will only do so in return for a much higher interest rate and may also ask for a guarantor in case you then default on the arrangement.

How can you improve your credit score?

There are various ways to improve your credit score for example:

  • By registering on the electoral roll. This will prove to your lender that you have a regular home address and generally speaking, the longer you’ve lived there, the better.
  • If you’re financially associated with someone else (such as a partner or spouse) then the lender will consider this information too. This usually happens when you take out a joint product – for example, a loan or a mortgage.  Remember, if the person you’re financially associated with defaults on any arrangements then this could have a negative impact on you too.
  • If you’re not currently responsible for the repayment of any utility bills then it’s always a good idea to take on at least one since this will prove to the lender that you’re able to make repayments on time. Sometimes having ‘no’ credit history is just as bad as having a ‘poor’ credit history so the more you can do to establish a working credit history, the better.

Responsible lending

If you enter into any type of repayment plan then it’s imperative to keep it up-to-date.  You can regularly review your credit score by joining Experian and if you notice anything unusual you should enquire about it straight away.

Unfortunately, there are never any guarantees in terms of interest rates being increased so always ensure you understand exactly what you’re going into and don’t be afraid to ask questions before you commit to anything.

Fortunately, credit card companies have now made certain pledges to protect the consumer which include:

  • Not to increase your credit card rate within the first 12 months of taking it out (provided that you don’t breach the account’s terms and conditions of business). Beyond that, however, the rate can only be increased once every six months.
  • To inform you if your rate is due to be increased. If you get notification of this, always be sure to check your credit rating in case they’ve based this decision on some recent activity on your credit file which you might not be aware of.
  • Giving you at least 30 days’ notice of any increase in their interest rate which provides you with the opportunity to repay it beforehand.
  • Not to increase your interest rate if you are suffering financial difficulty. So if you’ve fallen behind with your repayments then be sure to seek advice at the soonest opportunity.  You can either talk with your lender directly or speak with one of the many debt counselling agencies (details of whom can be obtained from your lender upon request).

If you want further advice on how to improve your credit score then don’t be afraid to ask and/or speak with the credit reference agencies directly.  Suffice it to say, you want to ensure that your credit rating stays strong, regardless of whether you’re planning to lend money either now or at some point in the future.