Payday lending is dead; Long live the loan sharks !

January 28, 2015

Few will mourn the demise of the Payday loan companies who can no longer operate profitably after changes introduced by law. Well, few except those that relied on them to manage each month. Changes in the law introduced recently set a maximum interest rate of 0.8% per day and a cap on certain charges that has dramatically changed the dynamics of Payday lending; but the killer blow is likely to be the overall cap that restricts the total that can be demanded at twice the original loan. So, will those same Payday borrowers who can’t get regulated Payday loans now be forced, as some believe, to use the unregulated market by entering the murky world of the ‘Loan Shark’.


Mr Wheatley, of the FCA, said that the regulator’s research had shown that 70,000 people who were able to secure a payday loan now would not be able to do so under the new, stricter rules. They represent about 7% of current borrowers, suggesting around 1.0 million regular payday borrowers in total!

However, he disputed the industry’s view that many of these people would be driven into the arms of illegal loan sharks. He said most would do without getting a loan, some would turn to their families or employers for help, and only 2% would go to loan sharks. But that is still 1,400 individuals being exploited by unregulated and often unscrupulous lenders. And many believe this figure is understated.

Wheatley added that he wanted to see a responsible, mature industry for short-term loans. But where is that likely to come from? The people using Payday loans were typically excluded from main stream borrowing by reasons of circumstance, often with poor or little credit history. The banks aren’t likely to relax their lending policy anytime soon.

Wheatley cites families or employers as filling the lending gap, but is this realistic? Employers are unlikely to fill this gap, either being too large (policy against salary advance) or too small and therefore unable or unwilling to invest time and cash (the big banks aren’t lending to business either!) in supporting this idea. Family or friends? Well it assumes they have the cash, the desire and are willing to risk the relationship with a loan, probably unsupported by any formal ‘paperwork’.


So what about Guarantor loans? These are regulated loans that can be offered to a borrower supported by a guarantee from a friend, relative or employer. The lender doesn’t have to have ready cash just a decent credit record and it structures the loan within a legal and documented framework. It also puts a professional organisation between borrower and family member; no bad thing to protect the relationship, and the good news? Guarantor loans are much cheaper than payday loans.

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