woHow big is the payday lending industry?
Before 2008, the payday UK loan industry was considerably smaller than it is today. Approximately 250,000 people used short term loans in 2006.
From 2008-2012 the sector experienced rapid growth.
In the 2011-2012 financial year, consumers borrowed an estimated £2.2 billion in short term and payday loans.
According to the Consumer Finance Association, between 7.4 and 8.2 million loans were took out this financial year.
The Competition & Markets Authority estimates that these loans were took out by 1.8 million different people. Also indicating that many borrowers had a long list of loans in their name.
On average, consumers had just over £1,200 of payday loan debt.
At this point, there were roughly 240 lenders from which to choose from.
More so the amount of credit card debt in the UK was more than five times the amount owed to payday lenders.
Short term loans made up a relatively small amount of consumer debt.
As the market grew, large numbers of consumers struggled with their debt.
Many lenders were offering loans without in-depth affordability checks. And they were largely unregulated, which meant many providers were not kept under control.
Some lenders resorted to unprofessional methods of chasing debt. Many charged extortionate interest rates and unrealistically high fees.
Between 2012 and 2014, growth slowed.
Payday loans were controversial and the risks of borrowing were widely known. Some short term loan providers had bad reputations. This deterred consumers from using them as credit sources.
The story in 2015 was a little different.
2015 statistics show 3.5 million people took out payday loans.
This rise in suggests a number of people feel comfortable using short term credit.
By June of 2015, the choice of lenders decreased due to changes in payday loan regulations.
More than a third of the 240 lenders available in 2011 had ceased to trade by this time.
Those that remain have experienced dramatic industry changes. Also they have made considerable adjustments to continue offering their loans.
As a result, the panel of lenders you can choose from are watched, and regulated and subject to many rules.
Borrowers are now much more protected. Lenders now maintain much more stringent affordability checks.
Contrary to what an increase in borrower numbers might suggest, it is now harder for UK consumers to access this type of credit.
Who are the leading players?
The most well-known UK payday lender is Wonga. They are also the leading lender, with an estimated market share of between 30% and 40% in 2014.
CashEuroNet is the UK’s third largest lender. Their brands are QuickQuid and Pounds to Pocket.
Together, the three largest lenders account for roughly 70% of all payday loan revenue.
The ten largest lenders hold 90% of all market revenue.
Are new lenders entering the payday UK loan market?
Most consumers can name one or two of the leading players. Yet smaller lenders that make up the remaining 10% of the market are often worth consideration.
The New lenders joining in may have something different to offer. Because they will be competing against big names they often have to work even harder to stand out from the crowd.
As many lenders can no longer advertise on Google, the smallest companies could be even harder to find. Despite the potential extra effort involved, consumers should not rule out the newer lenders. Or indeed the smallest lenders during the loan application process.
The FCA and industry regulation
The payday loan industry becomes surrounded by controversy.
Before 2015, lenders were not so strictly regulated and consumers were able to borrow money with relative ease.
When debts could not be repaid, some lenders resorted to unprofessional methods of debt chasing. With limited regulation, many companies were being set up with no controls in place.
Affordability checks did not always happen as they should have. Loan providers were acting unfairly and irresponsibly.
In April 2014, the Financial Conduct Authority (FCA) began to regulate the industry. Since January 2015, the following regulations have been put in place:
- Interest rates are capped at 0.8% per day. This equated to 80p of interest per £100, per day.
- Default fees, for late payment, are capped at £15.
- No borrower will ever have to pay back more than double their original loan amount.
Payday UK loan compensation and loans written off
Many lenders had to pay compensation as a result of their debt collection methods. Included were some of the UK’s largest lenders, such as Wonga.
In June 2014, an FCA investigation led to Wonga agreeing to a £2.6 million total compensation payment.
In October, 330,000 Wonga customers had their debts completely written off. This was due to a lack of affordability assessments when they’d applied for their loans.
Increased protection for consumers
Affordability assessments are much stricter now than they were before 2014. The FCA also operates a register of lenders. This provides consumers with the means to check companies are registered, authorised and approved.
The FCA regulations have dramatically altered the market. Many lenders could not operate under the new regulations and closed for business.
More than a third of available payday UK lenders have completely disappeared from the market. This includes some of the companies that were amongst the top short term loan providers nationally.
A new approach to lending
As a result of the new legislation, lenders offering short term loans have had to change their business models.
Wonga underwent significant changes resulting in a published £80.2 million loss through 2015. Also announcing that the company’s “transformation [was] progressing to plan”.
Lenders have been working hard since the FCA regulations were introduced. They have been cutting costs and improving service to adjust to changing requirements. Many faced significant compensation claims that they had to react to.
Also the attitude of the general public towards the payday loan industry has had a negative impact on revenue. Lenders are slowly regaining trust, but it is a process that can take time.
Most lenders now offer similar loan rates. Before legislation changes, lenders often had extremely varied cost and repayment structures.
Today’s regulated lenders closely follow the FCA limits. Instead of competing on cost, lenders are now focused on what else they can offer customers. Things like better customer service, faster payments and their own unique selling points.
Who can enjoy a payday loan and who shouldn’t?
Lenders must carry out thorough affordability checks before providing loans to borrowers.
It is said that payday loans should be for one-off or occasional shortfalls. Borrowers should know when and how they will pay the money back. More so ensuring they meet their repayment deadlines. Borrowers also need to take into account other emergencies might arise before the debt is repaid.
The Competition & Markets Authority found 17% of borrowers underestimated how difficult it could be to repay their loan.
If a borrower finds themselves relying on payday loans regularly or repeatedly, then a payday loan is not recommended.
It is suggested payday loans should only be for emergencies, not for expenses such as holidays or home improvements.
If you find yourself searching for things like ‘how many payday loans can I get?’, you may be better finding alternative debt help. Or ways to increase income or decrease expenditure.
A Competition & Markets Authority customer survey found that 79% of all respondents had taken out more than one short term loan. Roughly 33% had taken out five loans or more.
Further payday loan statistics:
- 36% of freelance workers use payday loans to cover the shortfall when their clients don’t pay on time. This is fine on occasion, but it is important for freelancers not to get into a spiral of debt or a pattern of repeated borrowing.
- Throughout 2014, 3.5 million people (7% of all adults) took out a payday loan. 44% of borrowers used their payday loan for essentials. 25% used the money for a holiday or a treat. 12% used the money for birthday or Christmas presents and 18% took out payday loans to cover over debts.
- Most borrowers are between the ages of 25 and 34. 17% of people in this age group have taken out short term loans. Only 3.6% of people aged 45 to 54 have used payday finance.
- In July 2015, a study found that 27% of students owed money to a payday lender. 92% of those were late making repayments.
Are payday loan complaints on the increase?
The Financial Ombudsman recently released information showing that payday loan complaints are increasing. In 2015 there were 3,216 complaints compared with 1,157 in 2014.
This increase is a result of better consumer awareness. This is despite the FCA introducing much tighter industry regulations.
Payday loan companies in the UK are now acting more fairly and responsibly. This is as a result of industry legislation changes that have forced some of the less scrupulous lenders to close their doors.
The payday loan controversies of earlier years have led to more clued-up borrowers. Consumers are learning more about their rights and their options.
Fewer people need help to manage their short term loan debt, showing FCA regulations have made loans more manageable. Those that feel unhappy with the service that their lender has provided are more likely to make formal complaints.
The figures presented by the Financial Ombudsman should not be a cause for concern about the condition of the UK payday loan industry. But they should be a reassurance that consumers are being better protected.
It is in a borrower’s best interest to be aware of both their rights and responsibilities.
What information should you provide for a typical payday loan application?
Though lenders might structure their forms in a unique way, most ask for the same information from potential customers.
The following is a list of information that is usually required as part of the loan application
- Personal details including the consumer’s name, address, date of birth and residential status.
- How much money you need, and the desired term length. Most lenders have an online calculator, enabling consumers to check the cost of their loan before applying.
- Details of income and expenditure.
- Bank account details.
- Debit card details. Repayments are typically taken by Continuous Payment Authority (CPA).
Consumers can apply directly to their chosen lenders, but this is likely to leave a footprint on their credit file. These will usually be seen by other lenders and will show searches have proceeded.
Having many footprints on a credit file can affect a consumer’s chance of acceptance.
Since most payday lenders need the same information, it is possible to apply to many at once. Loan brokers provide the opportunity to make one application which gets sent to many companies. These applications do not need a credit search. And they ensure you match with the best possible lender based on the information given. This can reduce credit file impact and may increase the borrower’s chance of receiving a loan offer.
Once matched with a lender, a formal credit check will usually need to proceed.
It is estimated that roughly 40% of all payday loans are currently the result of a broker application.
How is digital innovation changing the payday loan industry?
As technologies improve, so do credit options and affordability assessments
Amongst those taking advantage of new technology advancements are SafetyNet Credit. They offer ‘smarter credit’ for consumers.
The lender offers what is known as a revolving line of credit.
Traditional credit cards are a well known form of revolving credit. A borrower can withdraw and repay as often as they like until the agreement comes to an end.
Occasionally, this type of borrowing is also known as an ‘evergreen’ loan.
SafetyNet Credit offers a high degree of flexibility. Borrowers are able to withdraw in cash or top up to cover Direct Debits with the option of continual use. Something you would normally associate with a credit card.
Like other payday loan providers, SafetyNet Credit can put money in a borrower’s bank account within a short space of time. Although subject to credit checks and affordability assessments.
Technology helps companies like SafetyNet Credit to carry out more thorough assessments.
They don’t simply rely on credit checks and a consumer’s own statements about their income and outgoings. SafetyNet Credit connects with a customer’s bank account.
When you apply for a loan, you’ll have to provide your online banking information. These details are stored securely, and provide read-only access to your bank statements.
This means that money cannot move around or transferred out of your accounts.
The lender can check your statements for evidence of income and outgoings. Also offering a more responsive (and responsible) service.
Lenders like SafetyNet Credit can perform ongoing affordability checks. Especially by having direct access to bank statements
If a borrower’s circumstances change, the reaction can be quick and effective. Helping to reduce the number of situations where consumers are struggling with repayments.
Technology also provides access to new methods of borrowing.
Loans have rarely provided as revolving credit finance in the past. With direct bank account access, this is now changing.
Lenders like SafetyNet Credit offer an ongoing loan, working in much the same way as an overdraft. For example, you are about to trigger an unauthorised overdraft (which may cost you £5 per day). Yet a small (cost effective) short term loan can help to escape the situation.
Interest on a payday loan would be no more 80p per £100, per day. If you were in your unauthorised overdraft, by as little as 1p, you might have paid £5 for the same period of time.
Of course, with a revolving credit facility, the loan could be much less than £100. Also meaning the cost of repayment could be less when compared to standard bank charges.
As technology improvements evolve, lenders can offer a broader range of borrowing options. As a result individuals in need of short term loans can select the most appropriate solution.
Without doubt, the payday loan industry is one that has changed beyond all recognition over the last decade. Innovations and fast reactions have been essential to progress. We can almost certainly expect many further changes in coming years. More so as lenders seek to differentiate themselves from their competitors.
A decade ago, the payday loan industry quietly existed in the background. Short term loans were not a popular form of credit, because so few had even considered them as an option.
In 2016 the situation has changed.
The payday loan industry went through unprecedented growth. The industry experience, the introduction of strict FCA regulations and industry is settling down. And are rebuilding almost from the ground up to offer fairer and more responsible short term lending.
Industry regulations have capped interest rates, default fees and total loan repayment amounts. As such, making payday loans more affordable and predictable.
These caps have caused lenders to closely follow one another with their prices and fees. And instead making efforts to stand out with great customer service and defined USPs.
Developments in technology have further broadened possibilities for lenders. They have enabled stricter affordability checks and revolving credit options.
As the payday loan industry works to regain trust, there are warnings to consumers about how short term credit should get used.
These types of loans are an option for occasional, or one-off, emergency use. Yet figures suggest that 56% of borrowers are using their loans for non-essential purchases.
Statistics state consumers now have a better understanding of their rights when making use of short term credit. Formal complaints are increasing in number, but the level of people seeking help are lower than in the past.
Application forms for payday loans are often similar. It is important to know an application with a direct lender will need a credit check which can impact an individual’s credit rating.
As a result, a growing number of borrowers are turning to brokers to submit applications to many lenders at once. This speeds up the process and improves acceptance rates. Initial acceptance by lenders can reduce levels of unsuccessful applications and repeated credit checks.
Consumers should always carefully consider whether a payday loan is right for them.
In some cases, these loans are the most affordable finance option.
They can also be more readily available in emergencies when other types of credit can take longer to access.
For the payday UK loan industry, the most important thing is that lenders continue to act responsibly. And that consumers have a choice of trusted products and lenders to choose from.