Payday loan schemes in the UK are often vilified as costly and exploitative, and their regulation was welcomed by many. But that shouldn’t be the end. Karen rowlingson, Lindsey appleyard and Jodi gardner They argue that we need to take a closer look at why people use these services in the first place, and suggest that we could learn from some aspects of their business model to improve others.
The amount of credit granted through personal loans. increased ten times between 2006 and 2012, from £ 0.3 billion to £ 3.7 billion. With staggering APRs typically exceeding 3,000 percent, this increase raised growing concerns about the cost of such credit falling on the poorest during a time of austerity. Several high-profile campaigns were subsequently mounted and, as a result, the UK Financial Conduct Authority introduced landmark reforms in 2014/15, including a cap on the cost of high-cost short-term credit (mainly payday loans).
In general, these reforms have been welcomed as a way to curb “extortionate” and “predatory” lending. Nevertheless, our research, based on in-depth interviews with 21 people who had borrowed from payday lenders in the previous year, presents a rather different picture.
We argue that while recent payday loan reforms should be welcomed, we should not subscribe to the rather simplistic image, presented by the media and many activists, of the “evils” of payday loans. . Our interviews showed, in fact, that various aspects of payday loans are welcome by clients, given the situations they find themselves in.
For example, borrowers in our study generally appreciated the fact that the online application process for a payday loan was simple and quick. They liked the fact that they had access to credit the same day, if not within an hour after their application was accepted. Some also liked the anonymity of the online process as they felt embarrassed or embarrassed about needing credit and did not want to feel judged. The desire to maintain dignity / avoid embarrassment has not been highlighted previously in relation to payday loans, but it fits with recent research interest on the role of shame in relation to poverty. Compared to conventional financial services, payday lenders were fast, efficient, and customer-friendly, offering a service to people who needed it.
Quick access to credit is a well-known feature of payday loans that is hotly debated, with some arguing that access could be “too fast.” However, less attention is paid to another characteristic that borrowers also value in general: the fact that a payday loan could be paid out quickly. Many of the borrowers we interviewed wanted to pay off their debts as soon as possible and they really liked the fact that the payday loan could be repaid quickly. Therefore, the nature of payday loans is very different from ongoing credit card debt or longer-term personal or home loans.
Of course, payday lenders weren’t providing this service out of altruism, but because they were able to make a profit from those customers. Borrowers were undoubtedly aware that this was a very expensive form of credit. Despite the high cost, most payday borrowers repaid their loan on time. However, some do not and therefore would incur (before the reforms) high default fees that can lead to a vicious debt spiral. Therefore, the reforms must, again, be welcomed as a way to reduce the most egregious practices in the sector.
Therefore, the focus on payday loans has been important, but to some extent it has diverted attention from the high cost of other forms of subprime credit such as: collected (or door-to-door) credit and debit loans. newspaper, which have not been subject to the same reform. Traditional banks have also escaped attention with their costly overdrafts and a lack of products suitable for low-income people.
Finally, payday loan reforms do nothing to address the root causes of the problem, which are found in: growing income insecurity for working and jobless people; cuts in the provision of state welfare; and increased financialization. Our borrowers cited a number of reasons for needing money, including: variable wages; unsafe work (such as zero hour contracts); self-employment; Job’s lose; low levels of income from benefits; loss of profit income due to cuts and penalties; and delays in benefits.
Along with these reforms, therefore, we call for other types of reform, including an expansion and reform of local welfare to provide interest-free (or low-interest) credit along with increased support for credit unions. This could be partly financed by major banks, as is the case with the Good Shepherd Microfinance Schemes in Australia. The high cost of overdrafts, credit cards, rent-to-own, home loans, and home loans also require more attention, as they have not been captured by recent reforms. Other changes would also be helpful, including: reducing benefit delays; provide more independent and free debt / money advice; and ensuring that utilities effectively support people struggling to pay their bills. It is only through theoretically informed and empirically rigorous research that we can identify appropriate policy responses to payday loans (and other forms of) lending within the context of the broader mixed economies of welfare and credit to guarantee loans and responsible borrowing.
Note: this blog is based on Article ‘Payday Loans In The UK: Regulation A Necessary Evil?’ Social Policy Magazine, 45, 3, 527-543
Karen rowlingson He is Professor of Social Policy in the Department of Social Policy and Social Work, as well as Deputy Director of the Center for the Management of Household Assets and Savings (ABYSS).
Jodi gardner is a University Lecturer in Contract Law and Tort Law at Corpus Christi College, Oxford University. His research focuses on credit and debt, specifically focusing on the impact the legal system has on vulnerable borrowers.
(Image: HelenCobain CC BY 2.0)