Not today, Mr. ATM – payday loans keep doors open for consumers when it comes to avoiding overdraft. (Photo: Flickr)

The UK Office of Fair Trading’s recent decision not to enforce a more stringent cap upon payday loans should prove to be a boon to both consumers and the short term loans industry. A press release by UK payday loans company Speed-e-Loans CEO Gary Miller-Cheevers welcomes the decision the OFT reached upon completing its “High-Cost Credit Review,” which the office defines as “financial products including home credit, short-term small sum lending such as payday loans, pawnbroking and rent-to-buy retail credit.” However, as both the Office of Fair Trading and most proponents of payday loans point out, “high cost” is a relative term, as credit-constrained consumers who use payday loans often do so to avoid a more expensive alternative like checking account overdraft.

Payday loans: A valid option in the marketplace

While payday loans may not be perfect for all consumers, those who have difficulty obtaining emergency credit via other means found the service most invaluable, said Miller-Cheevers. The OFT’s review unearthed few complaints regarding such short term loans. In fact, the majority of customers surveyed in the High Cost Credit Review found that UK payday loans agencies tended to be sympathetic if they made late payments due to continued financial difficulties. The companies proved willing and able to work with customers to mutual satisfaction.

Miller-Cheevers takes exception to ‘high cost credit’ tag

Beyond the relative definitions of “cheap” versus “expensive,” Miller-Cheevers pointed to the advantage payday loans have over bank overdraft protection: payday loans are cheaper. “Our typical APR is 2,334 percent,” he said (Editor’s Note: In the U.S., payday loans are typically offered at much lower APRs). “This sounds horrendous. However, you have to bear in mind that this is the annual rate someone is charged, and payday loans are not designed for long term borrowing. It’s a bit like buying sausages in a supermarket and the price being shown per ton!”

The APR mismatch

Miller-Cheevers’ Speed-e-Loans company charges about 1 percent per day plus a fee of £4.95 for 20-day payday loans. For the purposes of U.S. conversion, one British pound sterling is approximately $1.48. Thus, a £100 payday loan taken for 20 days would cost about £25.94. Similar to the rules U.S. payday loans companies must follow as prescribed by the Truth in Lending Act, UK payday loans outlets must publicize the APR, which in this example would be 2,686. Again, remember, the relative cost here should be compared with an equivalent alternative, such as overdraft protection.

How do Speed-e-Loans payday loans compare with overdraft?

Four High Street banks and their overall charges for a £100 over the same period of time are compared on the Speed-e-Loans website. Bank rate samples were taken in November 2009. At Alliance Leicester, a £100 checking overdraft would accrue a £100 charge (that’s £5 per day over 20 days). Thus, a £200 total charge would be the final result. At Halifax bank, the cost is the same. NatWest would charge £210 total (up to £90 for returned items, £20 per month overdraft fee). Lloyds TSB charges £300 (£20/day for 10 days; 20 days would of course be worse).

Then there are Speed-e-Loans payday loans. For a £100 payday loan, the total amount a consumer would pay back in 20 days is £125.94. The UK Office of Fair Trading can see that this option can easily be less expensive for consumers. In America, the same holds true for payday loans.

Sources:

BigNews.biz

Difference Between

Payday loans: Avoid overdraft, even when abroad:

Enjoy capitalism. Payday loan customers do. (Photo: Flickr)

Payday loan rate cap laws have circulated in various forms through the halls of state-level politics in the U.S. for years. However, not all countries that allow payday lending to serve consumers in need of easy loans are so eager to institute a rate cap that could stifle the natural price controls present within a free market economy. The Guardian newspaper reports that the UK’s Office of Fair Trading (OFT) has found that an interest rate cap on payday lending is unnecessary, claiming that a lack of competition would harm that sector of the financial marketplace.

Payday loan competition not perfect, but works ‘reasonably well’

Access to easy loans and other forms of consumer credit that fall under the general payday loan banner is important for credit-constrained consumers. The OFT recognizes that market competition has helped regulate payday loan prices. The level of competition between easy loan outlets may not be as effective as it could be, but the OFT is confident in their assessment that payday lending markets work “reasonably well.” Despite resistance from the Archbishop of Canterbury, the Financial Inclusion Centre and the debt charity coalition Debt On Our Doorstep, the OFT concluded that the payday lending market did not need a more stringent rate cap. However, the OFT did recommend further investigation into how an industry-wide “code of practice” could be instituted for the UK payday loan industry.

Finance & Lending Association agrees with OFT decision

Fiona Hoyle, Head of Consumer Finance for the Finance & Lending Association, told The Guardian that a payday loan rate cap “would have adverse unintended consequences for consumers, including for the cost and availability of credit.” If governments follow the Office of Fair Trading’s lead regarding rate caps – and take note of the Dartmouth University study in the U.S. on the effects of payday loan rate caps in Washington and Oregon State – perhaps they’ll see just how maintaining competition can aid the consumer while still allowing easy loans outlets to reasonably profit.

Simply clamping down isn’t the answer

Marie Burton, financial services specialist at the consumer group Consumer Focus – which operates independently from the payday lending industry – told The Guardian that the OFT has exposed just how hard it is to both promote competition and help drive down consumer cost. While that is the ideal, additional research into the workings of the short-term consumer finance industry in the UK may be necessary. Pulling banks and credit unions into competition by encouraging them to offer low-cost, low-hassle payday loan products would be most ideal for the free market, although banks and credit unions have failed at this before, considering America’s example.

Sources:

The Guardian

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