Payday loans – who uses them and why?

[…] from ‘Payday loans – cause of consternation or absolute lifeline’

In 2010, the OFT ran a study into short term loans and found them to be legitimate and useful; the following year, the BBC compared that report to the conditions that were rife in the economy then, which still exist today. We continue our breakdown of their interpretation of  The Office of Fair Trading’s report, here:

What makes up a instant cash loan customer?

You would think that with all levels of society looking for a little extra cash from somewhere, there would be no definition of your typical instant cash loan customer. The OFT report suggests differently.

The typical individual looking for a short term loan of this nature is, more often than not, a childless, single young male living in rented accommodation on a salary in excess of £1,000 per month. As short term loans can prove less costly than going into an unauthorised overdraft, lenders prefer a cash advance from alternative sources rather than incur daily charges of between £5-£10 day for the period that they have exceeded their agreed limit.

What is the size of the market?

The volume of the market has exploded since the OFT report in 2010. When the report was concluded, the volume was approximated at £900M, with 1.2M customers making up that figure.

A recent statement by the Citizens Advice Bureau suggests that the figure has quadrupled in the last two years. That would concur with a more recent estimate by the BBC that the market for short term loans in the UK now stands at £2b, more than a 100% rise in less than two years.

How many payday lenders are there and who regulates them?

According to the 2010 OFT report, there were 2,000 high street lenders, however, a fair proportion of those were branches of The Money Shop. The report also stated that there were 100 online lenders. There are, on face value, a lot more than that, now, due to the massive demand. However, there are only actually around twenty actual online instant cash loan companies – all of the other 1,000’s are affiliates or brokers of the parent companies. And, yes, all of them will have had to apply to the OFT for the consumer credit licence, which the OFT regulate and monitor

With regulations in place, why the consternation?

There is no problem with the organisations themselves and neither do the OFT have any plans to cap the amount of interest chargeable (anything between 2-4,000% for online payday lenders, give or take).

The problem lies firmly with the customer and how they can quickly let the short term loans get out of hand. Again, there is very little the OFT can do about the misuse of the money when it arrives in any individual’s hands.

As long as the lender is transparent with their charges, not misleading with their advertising and sticks within the guidelines of their terms and conditions (which will adhere to the credit license), they are doing nothing wrong and, as per the summary of the OFT investigation, providing a useful service to UK citizens who, for whatever reason, are struggling to make ends meet.

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