Should caps on payday loan fees be implemented?

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Financial watchdogs are under pressure from debt charities and politicians to issue limits to the maximum interest rates and penalty fees charged by payday lenders, as an increasing number of Britons struggle to pay off their loans.

Adding to the considerable column inches dedicated to short-term loans, new research from StepChange has shown that 42% more people are having difficulties with payday loans in the past year.

According to the data, in the first half of 2014 StepChange dealt with 43,716 consumers who were in trouble, compared with 30,762 in the same period last year.

Critics of the short term loans market accuse lenders of helping more and more squeezed families fall into a spiral of debt leading to extensive financial, social and health issues.

Call to action

Manchester Central MP Lucy Powell says she expects a large number of evictions and repossessions as people have their property seized by lenders. “A lot of it is to do with changes to welfare,” she said. “For a lot of my constituents they end up turning to payday lenders and are getting into more and more debt.”

What is payday lending? 

Payday lending aims to solve liquidity issues in households because it provides a short-term two- to four-week cash loan, with the promise that the recipient will repay the sum plus added interest when they get paid by their employer.

However, horror stories of recipients having to pay back inflated sums thanks to loan interest rates of up to 4000% has spurred campaigners such as StepChange to call for interest rate caps to be imposed nationwide on short term loans.

The Competition and Markets Authority found that the average initial payday loan taken out is £260, while the average StepChange client with payday loan debt has a net income of £1,305, meaning a large percentage of consumer debts make up their wages.

Hard to regulate

Industry regulators Financial Conduct Authority says it is considering ways of tightening its rules, but StepChange insists there should be a total cost cap for 100% of the value of a loan and a reduction of the maximum default repayment fee from a proposed £15 to £12, in line with credit cards.

Companies competing in the payday loans market argue, unsurprisingly, that further government and industry regulation will only have a stifling affect, preventing investment and innovation. The most well-known payday lender Wonga says the industry is still evolving and its continually changing nature made it near-impossible to regulate.

The succession of new entrants and fast product development in the sector will cause problems to regulation, the company said: “In dynamic and evolving markets where product boundaries are blurred, there are significant risks that any remedies will dampen existing competitive constraints, distort competition and undermine incentives to invest.”

We’ve lost control

Arguably, the bigger issue here is not payday lending as such, but normal people failing to gain control over their debts and there is evidence suggesting extra regulation won’t halt problems. A 2007 Federal Reserve study showed a higher rate of bounced cheques and bankruptcy from consumers in the US state of Georgia when pay day loan industries were regulated.

The popularity of payday lending reflects the huge number of people who have problems finding the cash to get through life in between paycheques, and unless the government or alternative agencies are able to find ways of servicing these concerns, crippling the market with over-regulation could just lead to more consumers being unable to pay their bills.

Supporters of payday loans say they are the only means of financing poor, low-income households, who are likely to have poor credit history and to have been rejected multiple times by banks. And for that the lenders need a return on investment to justify their risk and time (i.e the high interest rates).

The battle between parties for and against further regulation of payday loans is no closer to being resolved, but one can only hope that supporting financially-burdened families remains the heart of the debate.

If you enjoyed this article, read the previous one from Jermaine on the Government’s failure to collect debts from taxpayers, over £22 billion – eek! 

Jermaine Haughton is a journalist and digital media professional.

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