Have Payday Loans Improved over the Years? – Chapter 7: The Recommendations of the Competition and Markets Authority about the Payday Lending Market
Have you read the CMA’s investigation to the payday loan industry? It’s a must read for up-to-date informaion about the payday loan market. In this article, payday loan direct lender Payday Loans Net, highlights the key information of their investigation.
In this chapter you”ll read about:
- The typical payday loan customer
- Borrowers’ use of short-term loans
- Why borrowers were taking out a payday loan
- When most loans were taken out
- Affordability assessments and being turned down for a payday loan
- The recommendations of the Competition and Markets Authority about further changes in the payday loan industry – using online comparison sites; greater transparency; creditworthiness assessments
Released nearly a year after the Citizens Advice August 2016 report ‘Payday Loans after the Cap – Are Consumers Getting a Better Deal?’, the investigation by the Competition and Markets Authority must be read by anyone who wants to know the situation regarding the payday loan industry nowadays since their research is the most up-to-date.
The CMA report
The CMA report – released in June 2017 – is divided into two parts. The first part is an analysis of the payday UK loan market regarding customer profile, the size and number of loans, the reason for the loan, etc. In this chapter, we’ll be highlighting the key information of their investigation. We will see how much it tallies with the findings of the Citizens Advice survey.
In the second half of the report, the Competition and Markets Authority makes some recommendations for future changes which should be made to the HCSTC industry. How much do their recommendations agree with those of Citizens Advice?
A Typical Payday Loan Customer
The Competition and Markets Authority identify the typical payday borrower as being:
- A male
- Younger than the national average
- Living in larger households
- In full-time employment
- Earning less than the average UK salary of 17,500 pounds a year. (Borrowers who apply online have an average salary of 16,500 pounds a year. Those who apply at High Street stores have a slightly lower average salary – 13,400 pounds a year).
The independent research commissioned by the Consumer Finance Association confirmed this reasearch as explained in Ch.6. (The trade association for payday loans). It found the typical borrower is a male earning between 20-25,000 pounds a year in full-time employment. They are between 25 – 39.
Borrowers’ Use of Short-Term Loans
The CMA found that most borrowers took out more than one short-term loan. They took out approximately 6 a year using 2 or more different lenders. This was also true of the Citizens Advice report. It found 83% of those who successfully applied had taken out a payday loan before. According to the Competition and Markets Authority, many had experienced financial problems in the past. For example, 38% had a bad credit score or rating. While 10% had had a visit from a debt collector or bailiff.
In their survey, the CMA found that the majority of loans were less than one thousand pounds. The average size was 260 pounds. This doesn’t agree with the research by the StepChange Debt Charity. (It found an average loan of over a thousand pounds). However, this could be because the people they were seeing were experiencing financial difficulties with repeat borrowing.
The CMA’s investigation also showed that the average term of a loan was just over 21 days with repayment in a month or less with a single instalment. Their research hadn’t picked up on the trend for 3-6-month medium-term borrowing which had concerned both the Citizens Advice and the StepChange charity.
The CMA also found that the majority of borrowers preferred to take out a loan online rather than from the High Street with just over 1 in 10 using both.
The other interesting piece of information revealed by their research was that borrowers tended to take out a larger loan online. -An average of 290 pounds compared to 180 pounds for High Street payday loans.
Why were Borrowers Taking out a Payday Loan?
When asked their reason for taking out a payday loans UK, the results were as follows:
53% needed a loan to cover living expenses such as utility bills, groceries, etc.
10% needed a loan for vehicle- or car-related expenses
7% needed a loan for general shopping, e.g. clothes, household items
In a separate question, only 52% said that the payday loan was for emergency-related expenses. (Despite this being the generally-accepted benefit of a payday loan).
The fact that over half of borrowers needed the loan to cover priority debts like utility bills is something which we also saw in the Citizens Advice research as explained in Ch.5. It tends to confirm the suspicion that there’s an underlying problem hinting at low income and/or poor budgeting skills.
When were most Loans Taken out?
The CMA discovered that the majority of borrowers applied for a loan on Fridays at the beginning or end of the month. Because the borrower was under financial pressure, less than 50% shopped around to find the best possible deal before taking out a loan.
The CMA pointed out that most payday loan companies make use of a computerised risk model. They use it to assess the creditworthiness of loan applicants and to judge their ability to repay the loan. However, they point out that the sophistication of this computer model varies from company to company. They criticised that companies should ensure that their assessment of affordability should be as good as possible.
As far as borrowers’ being turned down for a loan, the CMA cites statistics of a rejection rate of over 50%. They say that this rate continues to rise as payday loans direct lender have become increasingly cautious about lending because of FCA regulations. This is very close to statistics provided by the payday loan trade association (the Consumer Finance Association). They said that the number of approved loans had dropped by 42% since 2013. The statistics of Citizens Advice perhaps give a misleading picture when they say that payday companies approve 89% of loans. As a debt advisory service, they’re more likely to see those with financial problems (both with and without payday loans).
They also point out that these regulations caused 4 out of the 11 major payday loan providers (and many of the smaller ones) to stop offering them in 2014 because of worries about profitability.
The Recommendations of the CMA about Further Changes in the Payday Loan Industry
As a result of their findings, the CMA made a number of recommendations for changes to further improve the HCSTC sector. Let’s look at what conclusions they drew from their research and how far this agrees with the suggestions made by Citizens Advice a year earlier.
Price Comparison Websites
Being under financial pressure means that less than half of short-term loan borrowers shop around to find the best company; something that they’d probably do automatically when purchasing other financial products or buying a product retail.
One of the main concerns of the CMA was to encourage payday loan customers to research the market before applying for a loan as explained in Ch.1 despite their time restraints. The best way to do this, they believe, is to improve the effectiveness of online price comparison sites for short-term loans. This would lead to better competition in terms of prices, fees and charges. At the moment (and unlike other financial products), most existing sites have limitations. This makes it difficult for borrowers to make accurate comparisons between different payday loan companies.
Another advantage of such an improvement would be to make it easier for new lenders to compete with existing ones when it comes to competitive prices.
The CMA recommends that there should be greater transparency on the part of payday loan companies when it comes to late fees and the overall cost to the borrower. They recommend that the FCA should take action to make the provision of clear information about charges and the cost of a missed payment a legal obligation. This suggestion was also made by Citizens Advice a year earlier. It was made when they found that 80.3% of payday loan borrowers had understood how much they would have to repay. However, the cost of extra fees because of late payments and the savings of paying off the loan early were less well-understood as explained in Ch.2. They thought that the borrower should have this information and it should be added to the Consumer Credit rulebook.
They also put forward a recommendation for greater transparency on the part of third parties. They’re concerned that lead generators, affiliates, brokers, etc. often pose as payday lenders. These representatives are more likely to make promises that can’t be kept or provide borrowers with inaccurate information. In these situations, borrowers might later get into difficulties and find they are misled by companies. This of course then tarnishes the reputation of the entire payday loan industry. Therefore, they recommend that borrowers should know whether they’re receiving a direct loan or an indirect loan through an intermediary.
The Competition and Markets Authority are also concerned that affordability checks should be as robust as possible. This worry reflects one of the main points of the Citizens Advice report. The report found that borrowers who weren’t assessed (or couldn’t remember it) were nearly twice as likely to experience difficulty in making their loan repayments.
The Competition and Markets Authority called for better cooperation between the FCA, payday loan companies, credit reference agencies and authorised price comparison sites. The CMA wanted to make sure that consumers were able to search the market without compromising their credit history.
They also emphasised the need for real-time data sharing to access clients’ credit information. In this way, any affordability check would be as accurate and thorough as possible.
Conclusion on the Competition and Markets Authority report
Many of the concerns of the CMA regarding the payday loan industry confirm the findings of Citizens Advice and other organisations. In general, they’re positive about the changes and improvements in the industry. They point out the successes of FCA regulations and the impact they’ve had.
The CMA is a government body occupied with encouraging competition in the marketplace and ensuring a fairer choice for consumers. Their main recommendations reflect their concerns. They believe the key to improving borrowers’ payday loan experience is the use of price comparison sites to ensure competition. Also, they believe that consumers can only make a well-informed decision about taking a short-term loan if they have the information. They should know the overall cost of the loan and also whether their loan is direct or indirect.