UK customers being penalized due to lack of competition in Payday loan industry

June 23, 2014

Lucy_2 (Custom)By Lucy Palmer-Richeson

Payday loan customers could be overpaying by more than £45m a year, according to competition regulator the Competition and Markets Authority (CMA).

According to the CMA, borrowers could be paying an extra £5 or £10 over the odds on each loan, due to payday lenders focus on speed over price.

With borrowers taking out around six loans a year on average, the CMA warn that a typical borrower could save between £30 and £60 per year if the market were more competitive.

Simon Polito, chairman of the CMA’s Payday Lending Investigation Group, said: “If you need to take out a payday loan because money is tight, you certainly shouldn’t have to pay more than is necessary.

“While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least.

“This can particularly apply to late payment fees, which can be difficult to predict and which many customers don’t anticipate.”

The CMA is demanding that payday lenders inform borrowers upfront how much they will be charged if they are late on their repayments, and that brokers are transparent about their activities so that borrowers know which firm will actually be lending to them.

One way the CMA suggest to increase competition between the loan companies, half of whom have pulled out of the market since the FCA introduced tough new rules in April, is to establish an independent price comparison website.

Even for those who do shop around, it can be very difficult to compare prices, given the difference between products, the lack of transparency on additional fees and charges and the shortage of effective comparison tools,” said Polito.

There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs.

The charity Citizens Advice is not sure that this is enough to ensure customers taking out payday loans get the proper assistance they need.

“As with any market, consumers need to have actual choice and the right information to decide which the best deal is for them, which includes details of any costs incurred if they struggle to repay,” said Gillian Guy, Citizens Advice chief executive.

“A comparison website could help people find a suitable loan, but it would need to come with a strong health warning about the risks of payday lending and direct people to where they can get free independent debt advice.

“For consumers to have real choice in the payday loans market, they need more responsible short-term credit options not just the ability to choose between existing providers,” she said.