MORE THAN 250 firms provide them, more than a million people use them every month and the number of Scots taking them out has soared threefold in just three years.
They’re now considered perhaps the most dangerous financial product of our time and calls for them to be banned are getting louder by the week.
But pay-day loans are still not properly regulated. Instead, pay-day lenders have been given carte blanche to introduce their own voluntary code of conduct, which came into force last week. They claim it will improve practices in the industry but, frankly, that’s not going to happen.
Under the new charter – given UK government backing in July – applicants must be given clear information on the way a loan works and a simple example of the cost of borrowing; loans can be rolled over no more than three times and lenders must freeze loan interest once they know a customer is in financial difficulty, among other measures.
It sounds constructive, but in reality it’s barely different from the previous code of conduct; after all the negative press of recent years, pay-day lenders have been allowed to get away with effectively rewriting an already flimsy code of practice.
The good news is that the previously relaxed attitude of the Office of Fair Trading (OFT) – which believes that up to £1.8 billion a year is being advanced by pay-day lenders – is finally hardening. It has launched formal investigations into over-aggressive debt collection practices, warning of possible closure for those failing to raise their game. Some are far better than others, but finding poor practices among pay-day lenders will be like shooting fish in a barrel. They’ve long been guilty of lending too much and being over-aggressive in pursuing repayment.
StepChange, a leading debt advice charity, told me that it has seen an increase of nearly 300 per cent in just three years in the number of its Scottish clients with pay-day loans. Meanwhile, Citizens Advice Scotland this week reported a 20 per cent rise in the number of cases involving unsecured personal loan debts, including pay-day loans.
Yet an outright ban on pay-day loans would be dangerous, benefiting only the real loan sharks. Cutting the supply does nothing to tackle the demand and does little to help those left high and dry by mainstream credit providers.
We did take a sizeable step in the right direction this week. The government is to give the Financial Conduct Authority (which takes over from the Financial Services Authority next year) the power to impose a cap on the interest rates that pay-day lenders can charge.
But a cap produces its own problems. Where do you set it? How do you ensure that it doesn’t drive more people into the arms of illegal loan sharks, in the same way that high street credit restrictions have boosted pay-day lenders?
So, stricter regulation and monitoring must remain the priority. When the government gave the new charter the green light, it warned of a crackdown on pay-day lenders if it found evidence of self-regulation not working. That evidence will present itself soon enough; we can only hope action is taken before too many more Scots are left with crippling debts after turning to pay-day lenders for an “easy”, short-term solution.
• Pay-day loans are, in a sense, another example of what’s in principle a decent product becoming toxic in the wrong hands. When paid off on time, they’re a viable short-term credit option; in the hands of exploitative lenders, however, they’re poisonous.
The same applies to payment protection insurance and we could say the same for interest-only mortgages. Used by the right borrower in suitable circumstances, an interest-only loan is a useful repayment option. Over the past decade, however, the bulk of them have been sold without the lender checking the borrower had a solid repayment plan.
That Noughties surge in sales is why the City watchdog has described interest-only as a ticking time-bomb, while others have predicted that they will be the source of the next big mis-selling scandal. Lenders are now walking away from the market. From Monday, Royal Bank of Scotland will no longer offer new residential interest-only loans, while Coventry Building Society has also withdrawn, following in the footsteps of lenders including the Co-operative and Nationwide.
The worry now that lenders are no longer offering new interest-only mortgages is around their treatment of existing borrowers. The regulator has told lenders not to offer unfavourable deals to mortgage prisoners, but at least one of the UK’s biggest lenders is doing nothing of the sort.
Yet interest-only mortgages will return one day because there is a demand for them. They’re a perfectly good product in the right hands and the regulator must ensure that the market isn’t wiped out entirely.