'Legal Loan Sharks' Target UK's Working Poor
US lenders pushing short-term loans that charge up to 5,000 per cent interest per year are targeting low-income UK borrowers abandoned by high street banks.
Such so-called payday lenders, which also include homegrown companies, have been attracted by Britain’s relatively unchecked market. The volume of business has more than tripled in four years to about £2 billion, according to one consumer group’s estimate.
An increasingly hostile US political and regulatory background has prompted many payday lenders to cross the Atlantic and move into some of Britain’s most deprived areas.
Typically providing loans of up to £400 for a period of two to four weeks, these lenders target borrowers on below-average salaries who have been unable to access bank credit since the financial crisis.
“There are now millions of Britons who can’t make ends meet as prices rise and unemployment bites and a lack of regulation means they’re being targeted by legal loan sharks,” Stella Creasy, a Labor MP, said.
In a sign of a looming crackdown on the sector, the Office of Fair Trading, which regulates consumer credit providers, is preparing to launch an investigation in the new year.
“The OFT seeks to ensure that consumer credit licenses are given to and retained only by those who are fit to hold them, including payday lenders,” said David Fisher, director of consumer credit. “Our focus is on protecting all consumers, including the vulnerable, from businesses behaving unscrupulously.”
The investigation is expected to attempt to weed out the lenders that fail to comply with new rules on transparency.
Some lenders themselves admit the UK has a softer regime than other countries.
Last year, Errol Damelin, the founder of Wonga, the UK payday lender, told Kevin Brennan, the then government minister in charge of consumer credit, that the UK had the ”most sane” legislation.
“Wonga’s business model would be illegal in some countries,” he said, according to minutes of their meeting, obtained through a freedom of information request.
A Wonga spokesman said the UK market was thoroughly regulated and that Mr Damelin was referring to the fact that some countries have limits on annual percentage rates for loans.
Official data on the payday market is hard to come by as most lenders are owned by private investors or foreign companies. The Bank of England does not break out the sector in its monthly figures. In a document published in March approving the merger of two large online payday lenders, the OFT appeared to admit that it lacked even basic information about the industry.
“While the OFT contacted known competitors to establish the total number and value of payday loans made, not all competitors were willing or able to provide the ... information,” it said.
Which?, the consumer group, estimated that the payday market was worth about £2 billion in 2010. Datamonitor, the research group, predicted that gross lending could rise to £3.5 billion a year by 2014.
The payday lenders say they are providing a transparent service for customers who may not be able to access credit elsewhere.
“There are not people who are getting into significant debt just because they’ve taken out payday loans,” said John Lamidey, who heads the Consumer Finance Association, which represents the lenders. “In many ways we’re helping people avoid debt because we’re enabling them to smooth out peaks and troughs in income and expenditure.”
One concern is the proportion of borrowers forced to roll over loans for many months if they cannot repay them on time.