Have Payday Loans Improved over the Years? – Chapter 1: A Brief History of Payday Loans Industry in the UK
Payday loans have changed tremendously over the years. In this article, payday loan direct lender Payday Loans Net, looks at the history of payday loans, how payday loans have changed and how the payday loan consumers of today are much better of than the payday loan consumers of 2 decades ago.
This chapter gives a history of payday loans industries in the UK with an emphasis on the changes which have taken place. You’ll read about:
- History of payday loans
- Timeline of the key dates in the history of payday loans in the UK
- The UK – Use of pawnbrokers
- The beginnings and history of payday loans in the UK
- 2007-2013: The peak years for payday loans
- Payday loans draw media attention
- Changing the short-term loan industry with reform – The FCA takes over; FCA regulations; more recent changes
- The effects of FCA regulation – impact on lenders; impact on borrowers
- Credit for borrowers denied access to payday loans
- The future of the payday loan industry in the UK
In this chapter, we’ll give a brief history of payday loans industries in the UK. We will describe how and why it took off in such a big way. From its heyday around 2012-13, we chart the growing criticism and attention it attracted from all sectors of society as well as from the media. We go on to analyse the role of the FCA and the main pieces of legislation which were put in place to prevent the abuses in the system before explaining what impact this reform had on both lenders and borrowers. Seeing as lending criteria are much stricter for payday loans, where do people turn when they do not get access to a short-term loan? Finally, we look at the future of the payday loan industry – where does it go from here?
The History of Payday Loans
You might think of payday loans as a relatively new phenomenon. However, they have existed in the US for centuries. Workers would often take out short-term loans to tide them over until they received their weekly wages.
It wasn’t until the 1940s and 1950s that individual American states implemented strict laws. There were laws on the interest rates that these loan companies could charge. These short-term loans didn’t disappear. However, the procedure changed so that borrowers would write out a post-dated cheque to cover the sum they’d borrowed (including the interest). The situation remained like this in many states until the 1980 Depository Institutions Deregulation & Monetary Control Act. It allowed lenders to impose a high APR for the speed and ease of these short-term loans.
If historically, there was no provision for such loans in the UK, how did working people cope with their living expenses in an era of low wages and inadequate welfare provision?
The UK – Use of Pawnbrokers
If Americans turned to short-term loans towards the end of the working week, the working class in the UK would turn to ‘Uncle’ – their local pawnbroker. People pledged rings, bedding and even tradesmen’s tools for a fraction of their price. However, this would give people enough money until payday when the item is redeemed and then they may pawn it again the next week. And so the cycle continued. Despite the affectionate name given to them, don’t imagine that pawnbrokers were anything other than hard-nosed businessmen.
The beginnings of Payday Loans in the UK
Although people think payday loans made their appearance in the UK in 2006, the first High Street store to offer such loans opened in 1992 by the Money Shop. (The American company, Dollar Finance Corp owns The Money Shop). However, it would be true to say that 2006 was the year when payday loans made their presence felt with 330 million pounds’ worth of loans given in this year.
2007-2013: The Peak Years for Payday Loans
Other companies began to see the potential profits which could be made in this sector. They jumped onto the bandwagon. In the space of only 3 years, the payday loan industry took off in a way which no one predicted. From an industry worth millions at the start, by 2010 its profits had reached billions. According to research conducted by Consumer Finance, in 2009 alone 1.2 million people took out 4.1 million loans. They were worth 1.2 billion pounds.
Fuelled by the credit crunch and resulting recession and made worse by successive welfare reform and changes in employment practices. More and more Britons turned to the convenience of a payday loan. To see them through the month or to conveniently cover unexpected expenses. Excluded from borrowing from mainstream lenders because of tightening lending criteria, people were quick to see the benefits of such loans. This period of rapid expansion also coincided with a time when a whole generation was growing up in the era of the internet. Many customers preferred the ease and anonymity of applying for a loan online (rather than physically visiting a store).
As a result of these changes in people’s working and living habits, the number of loans continued to rise. At this time, the Office of Fair Trading estimated that there were 240 companies offering short-term loans. And 2,000 High Street stores (many part of nationally-run chains).
Payday Loans Draw Media Attention
At the time, this type of consumer credit came under the auspices of the Office of Fair Trading. It found itself inadequate to deal with the regulation of this rapidly increasing industry. To make matters worse, the media was full of stories about the abuses of the system. The media had tales of lenders allowing borrowers to roll over their payments from month to month. Including the addition of extra charges and fees, it seemed that a day didn’t go by without articles and news stories appearing about borrowers taking out a loan in the hundreds and ending up owing thousands of pounds. Because of this phase in the history of payday loans, the product has been tainted ever since.
Not only was there this bad publicity. But, some of the most well-known payday loan companies were found guilty of dubious business practices. Not only for the way they encouraged borrowers to take out further loans so that their debts very quickly spiralled out of control. But also for their debt-chasing tactics. From bombarding loan defaulters with non-stop phone calls to threatening letters from fictitious legal firms. Payday loan providers continued to be in the news.
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Despite this adverse publicity, the number of loans continued to rise reaching a peak of 10-12 million payday loans. They were given in 2012-13. It was worth an estimated 3.7 billion pounds. At the same time, a campaign begun led by Members of Parliament, debt advisory charities and organisations. (Even the Archbishop of Canterbury got involved). It was obvious that this situation couldn’t continue any longer and that reform was long overdue.
What changes and reforms did they implement to change the face of the High-Cost Short-Term Credit sector?
The FCA Takes Over Regulation of Payday Loans
One of the first steps taken in changing the payday loan industry was to transfer the supervision and regulation of the industry. It was transfered from the OFT to the FCA. The government felt that this regulatory body was more experienced in dealing with financial products. They would be more effective in controlling any abuses in higher-risk products like short-term loans.
The FCA carried out an in-depth analysis of the lending market. They consulted with a number of other organisations to find ways to make sure that payday loan providers would lend responsibly. And treat their customers fairly. Set out in the Consumer Credit Sourcebook (CONC), these regulations and guidelines apply to all companies in the short-term lending market. While some are regulations, others are recommendations which are considered good business practice (but not compulsory). Let’s look at the changes which the FCA made and the impact they had.
FCA Regulations for the Payday Industry
The first reforms to the short-term loan industry took place in April 2014. The FCA put restrictions on the number of times a company can roll a loan over so it could only be done twice; They thought this would put a stop to borrowers getting further and further into debt with repeat borrowing. The FCA changed the way that companies could collect CPAs from a bank account. Payday lenders were no longer able to collect as many times as they wanted. They could only take the full amount of the instalment. They couldn’t remove part payment from a borrower’s account. Payday loan companies could also only try to collect unsuccessfully twice.
The FCA felt that borrowers should make a well-informed decision when they took out a loan. Therefore, advertisements for payday loans had to display the APR prominently. All electronic and non-electronic communications had to display a risk warning.
The next major change in the regulation of the industry came in the following year. The FCA set a price cap on the fees and charges which a short-term lender could impose. Firms were no longer allowed to charge more than 0.8% of the sum borrowed per day. At the same time late fees couldn’t be higher than 15 pounds. Finally, the price cap meant no borrower would be expected to repay more than twice the amount they’d borrowed – however late they were in making their repayments.
In short, the 3 caps that the FCA put into place are:
- Interest and fees capped at 0.8% of the amount borrowed (per day)
- Default charges capped at £15
- Total cap of 100% – Borrowers will not pay back more than the amount borrowed.
Other recommendations in the Sourcebook (such as ensuring defaulters are offered an affordable repayment plan or referring them to free debt services) are just guidelines. Providers are able to interpret them as they wish. This free interpretation, more than anything, has meant that although there have been improvements to the payday loan industry, there still continue to be complaints about individual companies.
More Recent Changes to Payday Loans
Since June 2017, all online lenders are required to advertise their loans on at least one price comparison website. They are also required to display a link to this site ‘prominently’ on their own website. This measure is intended to encourage borrowers to research the market before taking out a loan. This keeps the marketplace competitive and open to newcomers.
Despite strong rumours in financial circles, in June 2017 the FCA categorically denied that it was planning to end or increase the price cap on payday loans. However, they said they were going to review the situation again in 2020.
The Effects of the FCA Regulations
There’s no doubt that FCA regulations have had an impact on the payday loan industry – for both borrowers and the industry itself. What effects have we seen?
Impact on Lenders
When the FCA imposed strict assessments and required that firms’ business practices should come under scrutiny in order to apply for a licence to give payday loans, they confidently predicted that the short-term loan market would shrink to only 2 or 3 major lenders. The reduction hasn’t been as large as this. In 2014 38% of payday loan companies left the market whilst others had to declare bankruptcy because of punitive fines/compensation ordered by the FCA for dubious and/or misleading business practices.
This is good news for borrowers since the companies which left the short-term lending market tended to be the ones which were guilty of the worse examples of irresponsible lending. They were also responsible for unfair treatment of their customers.
Impact on Borrowers
In a report released in August 2017, the FCA were very optimistic about the impact of their regulations on borrowers. Their research had found that borrowers were paying less for credit. They also repaid on time more often and needed less help from debt charities. Even when they asked for help, debt advisory services became involved at a much earlier stage before they had such high and unmanageable debts.
The research conducted by Citizens Advice reflects the positive outcome in their August 2016 report, entitled ‘Payday UK loans after the Cap – Are Consumers getting a better Deal?’ In the first quarter of 2015, they found there was a 45% reduction in people coming to them for advice about problems with payday loans.
Statistics vary, but they estimate that over half a million borrowers have been denied access to payday loans. This is due to stricter lending criteria. Unfortunately, just because they do not have access to loans, it doesn’t mean that they no longer have need of this short-term credit facility. So what happens to them now?
Credit for Borrowers Denied Access to Payday Loans
Unfortunately, the news isn’t encouraging. Without the help of mainstream credit facilities like credit cards and overdrafts and now blocked access to payday loans. Anecdotal research by debt charities would tend to suggest that borrowers are turning to other unregulated sources of loans which are open to abuse. Logbook loans and doorstep lending are two of the areas which are a cause for concern and need urgent reform. Other people are making use of rent-to-own companies. They could end up paying more than 4 or 5 times the retail price of an electrical appliance or item of furniture. As for loan sharking, the atmosphere of psychological (and often physical) intimidation which surrounds it and its very illegality make it very difficult to estimate with any accuracy how many people this affects.
Of course, nobody believes that the answer is to allow these people to take out loans which they could never afford to repay. However, there is a lack of credit facilities for these people. These facilities are not yet filled since the regulation of payday loans.
The Future of the Payday Loan Industry in the UK
The major problem during the history of payday loans when it first reached the UK was that there was no legislation in place to monitor and oversee the market. Any new financial product is open to abuse before financial watchdogs like the FCA are able to ‘catch up’ and make sure companies abide by a Good Practice Customer Charter. The fact that the FCA is still formulating new regulations (such as making payday firms appear on online comparison sites) means that they’re still regulating the market to make it as competitive and transparent as it can possibly be. Because of its reputation, the industry will continue to be investigated and researched to ensure it stays on track.
It’s impossible to predict what the future holds for the payday loan industry but one thing is for sure. There is definitely a market for their services.
No one can deny that the payday industry of 2017 bears no resemblance to what it was like 5 years ago. The lenders who are left are reputable and eager to supply a useful service with a commitment to customer care. There are now checks in place and stricter lending criteria. Payday loan providers are slowly repairing the damage done to their reputation by the disreputable firms which have since left the market.
People were suspicious of credit cards when they first became available in the UK. However, they are now a credit facility worth 55 billion pounds annually. It’s possible that in the coming decade, payday loans will become equally accepted. Now that would go down in the history of payday loans!