There is no sign of any abatement in the stream of bad press the payday loan industry is receiving, as a recent investigation by the Competition and Markets Authority(CMA) adds weight to growing regulatory concern.
The latest investigation into payday loans has found that a lack of price competition could be adding as much as £30 – £60 to customers’ bills. To make the charges more transparent, the CMA has recommended the creation of an independent price comparison website, which will allow prospective borrowers to see just how much their loan will cost.
Is there really a lack of price competition in the payday loan industry?
Although this proposal has been welcomed by a lenders’ trade body representing the leading payday lenders such as wonga uk, the CMA’s claim there is a lack of price competition in the payday loans industry is somewhat perplexing. A simple Google search for the term ‘payday loan lenders’ shows the true extent of competition in the industry.
The CMA claim it is specifically price competition that the industry lacks; however, along with convenience and speed, price is one of the most fiercely contested differentiators in the market. As we’ve already discovered, the payday loans market is bustling with competition. If new entrants into the market don’t compete on price, how can they ever hope to establish themselves in such a busy market?
The cost of convenience
The majority of people who take out a payday loan do so out of convenience. The average income of a payday loan customer is actually very similar to the overall population. It is often the case that alternative credit facilities take time to access, and often ask for long term commitments customers do not always wish to make. The Competition and Markets Authority claim that the lack of price competition could add £5 to £10 to the cost of a £260 loan over just three weeks. But is that the result of limited price competition in a market full of established lenders and new entrants, or the cost of convenience?
How much does a typical loan cost?
Research into the industry has shown that, on average, payday loan customers take out close to six loans a year. The regulator believes that, in a more competitive market, customers could make an annual saving of between £30 and £60.
The regulator added that some customers might receive a worse deal still, given the considerable gap between the cheapest and most expensive operators in the market. However, some commentators might argue that this diversity in price is further evidence of price competition in the market.
Should be there a cap on costs?
An investigation has been ongoing since last summer, after the Office of Fair Trading (OFT) raised concerns about the way the industry currently operates. The OFT felt customers were finding it difficult to calculate and compare the full costs associated with payday loans.
This contentious point has been privy to claim and counterclaim. The consumer group Which? believes the investigation has failed to get to the heart of the payday loan problem, which centres on affordability.
Which? feels the next step is to force lenders to be more transparent and upfront about the costs of their loans, helping consumers to make more informed decisions. However, the Consumer Finance Association, which represents a number of payday lenders, has welcomed the CMA’s recommendations, and believes the investigation has gone a long way to protecting choice and promoting competition, making it difficult for rogue lenders to establish a foothold in the market.
What should you consider before taking out a payday loan?
- Although the advertised monthly costs may seem low, the annual rates are considerable. Short term loans should only really be used in an emergency.
- Loans can be quick and convenient, but sometimes customer service levels fall short of the standards customers expect.
- There may be more affordable options out there, so make sure you explore every option available to you before proceeding with a payday loan.
Whether you’ve had a good or bad experience of payday loans, we’d love to hear from you. Have you received poor service? Perhaps the whole experience was much better than you expected? Either way, please your thoughts in the comments section below.