Not strictly our area but we often get asked our opinion on Payday lenders, whether they are a good thing or simply robbing the poor.
Well, we decided to use a little research and present our information about them.
What Are They?
Firms typically providing £2/300 loans to low-income earners for a period of up to 30 days.
Who Are They?
The most common name is Wonga. In an industry that typically operated very quietly and without notice, Wonga took a different approach and courted publicity.
There are several lenders, all operating in a slightly different way but all typically serving the same market.
The general assumption is that the APR is massive, extortionate, and taking advantage of low-income clients. However a recent study by PwC suggested –
‘In the case of Payday lending an APR is fundamentally misleading…It’s similar to suggesting the cost of a hire car is £15,000 per annum rather than a daily rate of £40. The total charge for credit may be a more beneficial measure for the consumer in this instance.’
The misunderstanding is that the majority of loans are short term, therefore quoting an annual interest figure is not representative, however consumer lenders are obliged to publish an APR.
Are They Regulated?
Yes. Under the Financial Services Act the consumer credit market will change from being regulated by the OFT to the new Financial Conduct Authority (FCA). The FCA will have the ability to cap charges and they take over in April 2014.
In addition the Consumer Finance Association, a relatively new trade body, whose members include The Money Shop and Cash Convertors, have recently changed their guidelines from a single page to a comprehensive set of procedures.
What Is The Future?
There is little doubt that a market exists for these lenders. In 2012 about 2 million people took a payday loan. In addition we are seeing voluntary regulation and government regulation, so the industry is doing the right things.
As for default, Wonga won’t reveal actual figures but in 2011 it made almost 2.5 million loans, averaging £255 and default percentage was in the high single figures. Probably lower than some people may believe.
The interesting statistics are in how loans are repaid, and how many are rolled over, rather than be repaid, however that is another story in itself.
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