Payday loan cap "not a silver bullet"

15 July, 2014

Following the announcement of the Financial Conduct Authority’s proposal for a price cap for payday loans, StepChange Debt Charity head of policy Peter Tutton said:

“Today’s announcement is a step forward, but capping the cost of payday loans is not a silver bullet. Fixing the many deep rooted problems of the payday loan market will require a range of measures and assertive monitoring and enforcement by the FCA.

“The FCA’s own research shows that the average payday loan borrower takes out six loans per year; 64 percent of payday borrowers have existing debts; 50 percent of payday loan borrowers suffer financial distress after taking out a loan; and that for many borrowers payday loans simply serve to worsen their financial situation. Many payday loan firms’ business model appears to be predicated on lending irresponsibly and trapping financially vulnerable consumers in unsustainable and unaffordable cycles of additional and repeat borrowing. This reflects what we see every day.

“The decision to cap the cost of loans at 100% of the amount borrowed will go some way to addressing the serious problem of lenders artificially inflating debts through rollovers and excessive interest and charges. We have reservations that this will offer great enough protections for financially vulnerable consumers. StepChange Debt Charity clients owe an average of £1,647 in payday loan debt, doubling this amount will still add a substantial financial burden.

“Amongst the payday loan industry’s other substantial failings are irresponsible lending and multiple borrowing. The FCA must ensure that there is strict enforcement of the rules governing affordable lending, and should mandate a system of real-time data sharing between companies. Until lenders have access to information regarding borrowers’ existing payday loan debts we will continue to see cases where people take out payday loans to pay off existing payday debts, driving them deeper and deeper into financial trouble.

“Credit, especially high-cost borrowing, will never be a solution to financial difficulty. We see too many people who have taken on more credit to try and cope with the burden of existing debt problems. It invariably makes things worse and payday loans are a major driver of this. People in financial difficulty need better protections from the pressures of debt that drive them to take on payday loans to cope with financial difficulties.

“We need a responsible short term credit market. Necessary FCA reforms may lead to payday lenders not catering to some people needing loans.  Mainstream banks, credit unions and employers all have a role to play in providing a more responsible source of loans and I hope the Government will do more to promote such schemes.”