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65% of payday loans 'paid in time' « Shropshire Star

Less than two-thirds of payday loans are fully paid back on time or early, research for the Competition Commission has found.

The Commission, which is carrying out an industry-wide probe following reports of “deep-rooted” problems in the payday sector, published a progress report into its analysis so far.

The report said that around 65% of loans are repaid in full on time or early and repeat use of payday loans, either by rolling one over or taking out another loan, is “prevalent”.

It has also found seven out of 10 customers reported that they had not shopped around before taking out their most recent loan, and six out of 10 said they had never done so.

Looking at “repeat customers”, the Commission said around half of customers who have never taken out a loan with a given lender before either end up either rolling over their first loan or borrowing more money from the same lender within 30 days of the original loan.

Three-fifths (60%) of new customers go on to take at least one further loan with the same lender within a year of their first loan.

The Commission’s estimates suggest that a payday customer will take out three or four more loans with the same lender within a year of their first loan with that firm.

It said that taking people borrowing from multiple lenders into account, repeat use of payday loans is “likely to be even more widespread”.

The Commission found that the biggest players in the sector account for most loans issued.

The three largest suppliers of payday loans in the UK are Wonga, a private UK company; US-listed company DFC Global Corporation – operating in the UK as Dollar Financial, which has three subsidiaries trading as The Money Shop, Payday UK and Payday Express – and Cash EuroNet, a subsidiary of Cash America which has developed three online lending products – QuickQuid, Pounds to Pocket and Flexcredit.

The Commission is considering whether payday firms would find it harder now to enter the market or expand than when the major lenders did.

Payday firms were referred to the Commission by the Office of Fair Trading (OFT), which last year found some firms appeared to base their business practices around people who cannot afford to pay their loans back on time, meaning the original cost of the loan balloons and they become trapped with that lender.

From April, tough new regulator the Financial Conduct Authority (FCA) will start to oversee payday firms.

The FCA recently announced plans to crack down on the sector, including limiting the number of times payday lenders are allowed to roll over loans to twice, forcing them to put “risk warnings” on their advertising and limiting the number of attempts lenders can make to claw back money if there is insufficient cash in a borrower’s bank account to two.

The FCA is also looking at capping the total cost of credit.

The Commission’s progress report estimated that around one million people took out a payday loan in the UK in 2012.

It said: “Although we have seen some evidence of a slowing in the rate of increase in demand for payday loans, growth remains relatively strong.”

The report said there is “a clear demand for relatively small, short-term loans, a demand which is currently largely being met by payday lenders”.

It found the typical payday loan customer is 35 years old and take-up of loans is higher in areas seen as having lower incomes and greater levels of deprivation.

Borrowers are more likely to live in households with children and men make up three-fifths (60%) of payday borrowers.

The average amount borrowed on a payday loan is £260 and the typical duration of a loan is 22 days. Three-fifths (60%) of borrowers said the loan was for something they could not have done without and 70% said the need for a loan was linked to a change in financial circumstances.

Around half of borrowers needed the money for living expenses such as food and utility bills and one in 25 (4%) used a payday loan towards their rent or mortgage.

The research also found around four-fifths of payday customers take out their loan online.

Of the minority of borrowers that did shop around, most found out how much it would cost to borrow from another lender (nine out of 10) and how quickly the other loan would be granted (eight out of 10).

Of those who said they compared loans with different lenders, around two-thirds compared the charges if they did not pay back on time. Of the three in 10 online customers who shopped around, half visited the websites of more than three lenders.

The Commission said its current view is that “the lack of substitutability and access to other credit products suggests that providers of other forms of credit will provide little competitive constraint on payday lenders”.

Many borrowers had experienced problems using other types of credit in the past, with 29% having been turned down for credit in the last 12 months and 52% having had debt problems in the last five years.

Some customers considered the charges of an overdraft to be “hidden” compared with those of a payday loan, the Commission found.

It said: “Most parties told us that the representative annual percentage rate (APR), which payday lenders are required to display, is not particularly helpful in helping borrowers to compare short-term loans or work out the total cost of credit.

“We note that banks are exempt from the requirement to display a representative APR when publishing their overdraft charges.”

The Commission plans to set out provisional findings in May/June, with a full report expected later this year.

Richard Lloyd, executive director of consumer group Which? said: “Our research shows that a million households a month are using payday loans, often to cover essentials or repay other debt. If a third of all loans aren’t repaid on time that means thousands of borrowers are paying default fees, pushing them further into debt.

“Payday lenders must justify the level of their fees and the regulator must take action to ensure all fees are fair, proportionate and only reflect lenders’ costs.”

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65% of payday loans 'paid in time' « Shropshire Star

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