Ever since its introduction in the UK market in the 1990s, to its striking growth post-2008, payday lending is a subject of high debates and criticism by financial experts in the UK. From being a mere £100 million industry on its inception in the pre-2009 era to a rapidly burgeoning industry of over £2 billion in 2017 the future of payday loans the UK continues to escalate.
The major criticism lies over the fact that there is no legal restriction over the limit of annual interest rates. The typical annual percentage rate or APR % can touch 1,000% or more. The case against payday primarily highlights that these astounding APR% could lead to a buyer’s trap for the borrower who is already struggling with poor financial health.
However, it is worth noting here that post restrictions on the limit of interest rate in the UK which was capped at £25 per £100 in a month, the growth of payday loans were somewhat restricted. Till date, payday loans have peaked growth within a period from 2008 to 2012 and have reduced since then. But at the same time, the opponents of these quick loans termed capping of £25 on £100 per month as a marketing gimmick to legalise the loan sharking by registered lenders.
Is legalised loan sharking or better than bank offers?
Most of the online payday lenders have reported the repeat customers multiple times in the year. There are many households who use payday loans as a viable source of gap fill before the next payday. They tout it is as the convenient channel to borrow as a poor credit borrower.
Owing to severe banking regulations and need for high credit score, and low growth of wages payday loans seem to be a preferred mechanism over short term instalment loans the UK.
There are lots of numbers that go in favour of the payday loans. According to the Competition Market Authority’s (CMA) market investigation on payday lending in the UK, on an average £260 is borrowed by the UK households as a payday loan in the reported year. Most loans raised were less than £1000 in value. It is interesting to know here that the average duration or term of loans was just over 21 days or three weeks in the UK. It is evident here that the most of the borrowers were ready to meet their obligations well within deadline as a lump sum instalment.
Looking at CMA market investigation on payday loans, we can enlist following customer behaviour for the industry:
- Most borrowers opted for multiple payday loans through the year, wherein average was 6 loans in a year, from 2-3 lenders.
- Online loan partners were on high preference for borrowers seeking payday loans. Call it, stricter lending regulations or unavailability of loans to the needy borrower, less than 30% chose high street lenders to meet their financial requirements. While 83% of borrowers, chose online payday loans! 12 % of the users used both at some point in time.
- It is worthwhile to know here that most payday loan customers are those with financial problems or bad credit history. As much as 52% of payday loan customers had some debt problems in the past and they used them as an alternative to poor credit loans the UK.
Thus a major percentage of payday borrowers in the UK are already indebted or are the ones with a high appetite for credit. Online loan providers who are filling in the demand with ‘legalised’ supply are categorically winning the market share!