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Payday loans after the cap: are consumers getting a better deal?

30 August 2016

Between 2006 and 2013, payday loans were everywhere; their advertisements staples of daytime television, city buses and billboards. At it’s peak in 2013, the payday loan market was worth £2.5 billion.  Citizens Advice saw a ten-fold increase in the numbers of people coming for help with these loans and urged the new regulator, the FCA, to take firm action against unscrupulous lenders. A price cap and other regulations followed and the number of payday loan problems coming through the Citizens Advice network halved. The question remained - what happened to the payday market after the cap?  This report [ 1.2 mb] finds that many payday lenders are still failing to conduct adequate affordability checks. Worryingly, borrowers who didn’t have an affordability check were nearly twice as likely to have trouble repaying their loan as those who did remember being asked about their ability to repay.

We look at Citizens Advice data alongside primary research to understand how borrowers are being treated by payday lenders after the cap and what levels of detriment are occurring. We also explore whether consumers are finding it more difficult to access credit and what happens when consumers are turned down.

To ensure that payday loan borrowers get a better deal we have made 5 recommendations:

  1. The FCA should make its guidance on responsible lending into a rule(s). Creditworthiness assessments should require, as a minimum, proof of income and expenditure.

  2. Firms should ensure that borrowers can easily and transparently understand how much they will owe in monetary terms if they fail to repay. The FCA should add this into the Consumer Credit rulebook.

  3. Firms should ensure that borrowers can easily and transparently understand how much they will save in monetary terms if they repay installment type payday loans early. The FCA should add this into the Consumer Credit rulebook.

  4. The FCA should look in depth at new developing business models in the High Cost Short Term credit (HCSTC) market to fully understand the risks they pose to borrowers and potentially ban those that result in significant detriment.

  5. Firms should adopt best practice in regard to debt collection to encourage borrowers to engage with them when experiencing difficulties.