The increased proliferation of payday loans via the internet caused debt charities to raise complaints with the Office of Fair Trading (OFT) in the UK in 2009. Their argument was that loans which were issued without credit checks constituted irresponsible lending and pay day loan providers should have their licences revoked. This lead to a year long review of the sector by OFT who have now concluded that “they serve borrowers not catered for by mainstream lenders.”
In the UK those who do not qualify for more traditional lending have previously turned to either pawn shops or loan sharks. Illegal unlicensed door step lenders who charge exorbitant interest rates and use threats and violence to recover loans are still an option for some, but payday loans have filled a much needed gap. Banks have closed their doors to high risk borrowers and payday lenders are a legal option for many who cannot obtain emergency funds elsewhere.
When payday loans lead to problems it is often due to irresponsible borrowing yet debt charities take the view this is caused by irresponsible lending. ‘Consumer Focus’ agrees with the OFT ruling saying that “simply clamping down on high cost lenders will not provide the answer”. The high APR’s on pay day loans are often less than the cost of servicing a traditional overdraft with typical charges ranging from £20 -25 pounds £100 borrowed. OFT believe that interference in the industry by capping APR’s would simply lead to increased late payment charges.
Complaints about pay day loans were driven by concerns about the number of US lenders moving in and targeting borrowers via the internet, but the complaints are short sighted when there is no viable alternative for those who need funds and are well serviced by pay day loans. Many are perfectly capable of using such loans responsibly yet they would be deprived of these services if debt charities had their way and lenders had licences removed.
There are laws already in place to prevent loan shark lending in the UK. There is no legal obligation for anyone to repay a debt from a money lender who is unlicensed by OFT although figures show that over 165,000 borrowers are already dealing with loan sharks. The OFT concludes in their review that other forms of low cost lending ought to be considered rather than stomping on legal pay day loans. Without a viable alternative, borrowers denied access to payday loans would have no option but to turn to loan sharks.