New payday loan regulations pushing people into unregulated credit?
Since last Friday, payday loans have been subject to tougher regulations from the FCA, which include daily caps on interest charges, maximum permissible charges and an overall cap that the amount repayable cannot exceed an additional 100% of the amount borrowed. While this is presumably good news for consumers who feel the need to take out this kind of loan, the payday lenders themselves have been less enamoured with the prospect of earning far less out of their easy marks, even if some of them (such as market leader Wonga) capitulated to lower charges last month in attempt to look like the good guys.
However, when the FCA announced the new rules back in November 2014, they reckoned that the changes would mean that an estimated 110,000 people would no longer have access to payday lending, although they revised this down to around 70,000 people as the market contracted following the initial regulation of the market from July last year. These people would, presumably, have presented so great a risk to the lenders that even payday lenders wouldn’t consider them a worthy risk without a potential return of more than 100%. At the time the FCA said that “these are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them.”
This is fine in principle, but it is perhaps unlikely that the people who needed a payday loan before the new rules will be thankful for the FCA’s protection and will go away and won’t need any money. What is more likely is that they will turn to an alternative source of finance.
Guarantor loans are the next payday lenders. They still charge extortionate rates (although granted not as high as the hey days of payday lending) and are not subject to caps on charges as they do not fall within the definition of payday lending for the FCA regulation. Guarantor loans are targeted specifically at those with poor credit ratings, whose only option is to ask a friend or family member to act as a guarantor.Companies offer loans of up to £12,000 for up to seven years at APR s as high as 54.9 per cent.
Clearly if you are paying 54.9% APR for seven years, the total amount repayable is going to be way in excess of 100% more than the sum advanced, with payday loan vanquisher Stella Creasy MP describing them as “a trap.”
But what is the answer? Should the regulations be amended to include these guarantor loans, or would that be the start of an ever-widening circle of regulation that would mean regulations rule the market? Would the people who need these loans thank the FCA for their help in preventing them getting access to (very expensive) cash, or do they really need protecting from themselves?