It’s time to ‘draw a line under’ criticism of payday loans and resist calls for more regulation of the industry, a group representing short-term lenders urged today. The Consumer Finance Assocation (CFA), whose members include QuickQuid and The Money Shop, said that new rules for payday loans had driven people into the arms of loan sharks.
Payday lenders have been forced to clean up their act lately after a wave of scandals over sky-high interest rates, ruthless collection practices and fake legal letters provoked the Government into introducing new regulations. Lenders are only allowed to charge 0.8% interest per day, default charges can’t be higher than £15 and total repayments are now capped at twice the value of the original loan.
That might seem perfectly reasonable, but the CFA suggests the rules could have resulted in more people turning to loan sharks. It said that loan volumes have fallen by 70% since 2013 and that the proportion of applications that are rejected is now at 80%. Of those who had been rejected, 33% had considered approaching an illegal lender and 4% actually had done so.
‘Our analysis of hundreds of thousands of loan applications proves that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances,’ said the CFA's chief executive Russell Hamblin-Boone. ‘It’s time to draw a line under the attacks on short-term lenders, recognise the huge improvements in lending and accept that we have a highly-regulated, legitimate market to keep people out of the hands of unscrupulous, illegal lenders.’
Of course the Government does need to ensure it maintains a balance between consumers’ right to borrow and their need to avoid debts they can’t repay. Mitigating the unintended consequences of regulation is very important.
But these figures don’t vindicate those who opposed the regulations that were introduced. It’s generally accepted that many of those who took out payday loans before shouldn’t have been able to do so and though a small percentage have now turned to illegal lenders, that’s no proof that the overall consequences have been negative.
It probably wouldn’t be sensible to regulate payday lenders any more strictly at this point. But if the authorities are looking for another target they could do worse than doing more to root out illegal loan sharks.