Price cap has unwanted impact
Borrowers risk being targeted by loan sharks
Short-term lending has fallen by 68% in the two years since price cap were imposed on lenders who were accused of charging rip-off interest rates.
The Financial Conduct Authority (FCA) set a cap on the cost of payday loans of 0.8% of the amount borrowed per day, which came into force in January. Companies such as Wonga were the key targets and were forced to change or drop advertising campaigns.
But the Consumer Finance Association (CFA) said in a report to MPs that 80% of loan applications have been rejected and, of these, 4% have borrowed from illegal lenders instead.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents a number of lenders including The Money Shop and Payday Express, said: “Our analysis of hundreds of thousands of loan applications proves that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances.
“It is time to draw a line under the attacks on short-term lenders, recognise the huge improvements in lending and accept that we have a highly-regulated, legitimate market to keep people out of the hands of unscrupulous, illegal lenders.”
There have warnings from Citizens Advice that the rules are simply moving borrowers to other parts of the market for credit products.
Citizens Advice said some are using “guarantor loans” which allow borrowers to use the name of someone else, usually a friend or family member, as security for a loan. This person is then pursued by the lender in the case of default or arrears.
However, those who campaigned from the tighter rules argue the new regulations have benefited those who might otherwise be sucked into a spiral of debt.