Expensive Lending in Northern Ireland a Discussion Paper

Expensive Lending in Northern Ireland a discussion paper ni the independent Centre for advice network Economic Empowerment Research Report: one Expensive Lending in Northern Ireland a discussion paper Centre for Economic Empowerment Research Report: one This paper was commissioned by the Centre for Economic Empowerment and was carried out by NICVA Research and Advice NI. 2 Expensive Lending in Northern Ireland INtroductIoN: thE rIsE of ExpENsIvE Expensive legal lending LENdINg – a definition Expensive legal lending refers to any Since the economic downturn began in aspect of licensed legal lending where 2007 there has been a significant growth in the rate of interest or APR is significantly expensive legal lending, including short term above rates offered by banks. In its cash loans known as payday lending. The ‘Review of High Cost Credit’ (2010) the number of people taking out payday loans in Office of Fair Trading describes the high the UK is estimated to have quadrupled cost credit sector as consisting of pawn between 2006 and 2010 broking, payday and other short term (from 0.3 million to 1.2 million). 1 small sum loans, home credit and There is also anecdotal evidence that there rent-to-buy credit. has been a rise in the use of ‘loan sharks’ - illegal money lenders. According to one estimate, in the UK there was an increase of 22% in illegally sourced credit between 2006 and 2010. 2 Payday lending – a definition This trend reflects the growing difficulty faced by many households to make ends A payday loan is a short-term advance meet in the context of reduced employment, designed to tide you over financially rising living costs, and the ‘credit crunch’. until payday. High cost borrowers primarily, Some payday loan companies allow you • have below average incomes; 3 to choose the repayment period, rather than basing it on when you receive your • are unable to access credit from salary. mainstream lenders; 4 The payday loan is usually paid straight • use the loan to pay for everyday into your bank account, often within 24 household expenses and unexpected hours of an application being approved. emergencies, (as opposed to The payday loan repayment, plus 5 luxury items). interest, is then taken directly from your This paper highlights some key concerns in bank account on the due date. The relation to payday lending and loan sharks. typical charge is about £25 per month It is based on a literature review, interviews for every £100 borrowed. Advertised with key stakeholders, 6 and an online interest rates (APRs) are typically eConsultation which invited debt advisers around 1,750%. and their clients to share their experiences Source: http://www.which.co.uk/ of expensive lending. 7 The paper will be used as a basis for discussions on how to address these issues. a discussion paper 3 payday LENdINg “We are seeing a growing number of students who are accessing payday pathways to payday lending loans. Most are using online providers People who access payday lending are and these companies seem happy to generally on low incomes – both in and out lend to students who have no regular of work – and turn to payday loans in order monthly or weekly income.” to pay for non-luxury items, such as utility (eConsultation, Debt Adviser) bills and school uniforms. 8 Debt advisers also indicated that high cost “I first got one [a payday loan] when lenders may be targeting vulnerable groups my hours were reduced in work and such as students and people on benefits. I had bills that needed paying.” (eConsultation, payday loan customer) “There are many on-line providers who are centring their business, and their “As a single parent to two children, business name, around those in benefits living on benefits, my income was and looking to profit from the most significantly low. Essential items such as vulnerable in society. It is true that those clothing and household furniture/white on a low income may be more likely to goods were beyond my reach.” encounter emergency situations that (eConsultation, payday loan customer) would require instant cash, but providing a loan which will accumulate “Other options became my only option rapidly is really not helping them.” as I had exhausted borrowings from the (eConsultation, Debt Adviser) social fund.” (eConsultation, payday loan customer) Lack of information A major issue is customers may not be fully “I turned to payday loans really because aware of the terms and conditions of the my credit rating was so poor and was payday loan. A survey by Trading Standards facing a few family emergencies.” of 29 loan companies in Northern Ireland (eConsultation, payday loan customer) revealed that the majority did not adequately explain the consequences of Students, many of whom are unlikely to have failing to repay a loan on time. 10 Trading regular income, are emerging as significant Standards also found that in every case the payday loan customers and a number of payday lender was unable to quote the payday lenders (e.g. Simple Pay Day Student Annual Percentage Rate (APR), as required Cash Loan and Student Cash Loan) are under consumer credit legislation. Research specifically designed for the student market. by the Office of Fair Trading (OFT) found A 2012 survey of 14,500 further and higher that an emphasis on speed and easy access education students found that 10% had to loans is leading to borrowers not getting taken out a high risk loan. 9 a balanced picture of the costs and risks involved. 11 4 Expensive Lending in Northern Ireland “I am seeing an influx of clients with “I didn’t disclose to the company that I payday loans who do not have the was on benefits though their checks money to repay at the end of the month didn’t discover this fact either.” and who are not aware of the charges (eConsultation payday loan customer) for missed payments.” (eConsultation, Debt Adviser) “Two clients in the same house had a whole series of payday loans from a affordability checks number of companies, i.e. both the clients had individual loans from the Given the gap in financial expertise between same companies, there appeared to be borrowers and lenders, there is an onus on no checks being made by the lenders. the latter to ensure that the loan is At one time new loans were being taken repayable. However research carried out in out monthly to cover for existing debts.” 2012 found that eight out of 34 payday loan (Interview, Christians Against Poverty) companies didn't carry out any credit checks as part of their approval procedure. 12 Nearly two-thirds of the people surveyed were not fines and charges asked about any aspect of their financial Fines and charges are commonplace. One situation apart from their salary. survey of people who had taken out payday loans found that in the last 12 months, 45% “Explanations of the interest rate and were subject to unexpected charges and charges are brushed over, if mentioned 56% incurred charges because of missed or at all, and credit checks are minimal.” bounced repayments. 15 (Interview, Debt Adviser) Inability to repay In a study of 50 payday lenders, the OFT In the above context it is unsurprising that concluded that credit-worthiness and many borrowers are unable to repay payday affordability policies and procedures are loans. 48% of people surveyed by Which? often incomplete; the OFT highlighted cases said they could not afford to pay back their where customers were issued with loans debts. 16 Similarly, the Irish League of Credit even though they did not comply with the Unions found that 43% of people who took lender’s written criteria. Only six of the 50 out payday loans to cover household bills lenders were able to provide documentary were unable to meet their repayments. 17 evidence that they assessed consumers’ This is likely to worsen a person’s credit likely disposable income as part of their rating and further reduce people’s ability to affordability assessments. 13 Trading access mainstream finance. Standards reported that half of the companies it surveyed would be willing to lend £100 even if the borrower failed a credit check. 14 a discussion paper 5 “I did not know what I was getting outstanding loans had been rolled over for myself in for and it really was not seven years, after which time the original explained to me very well - I guess I debt of £500 remained at the same level. hoped, foolishly, that I would be able to The client was in a desperate state, often pay the debt back within a few weeks.” spending an entire day on the phone (eConsultation, payday loan customer) ‘managing’ the loans. “Payday loans don’t come one at time “The level of debt is also increasing year but rather in batches. My first client with on year; whereas a few years ago an payday loan problems had nine in total. average large debt was £5,000 it grew When someone takes out a payday loan to £10,000 now it can be £25,000; and can’t make the repayment in full, individually there are cases with much the cost of holding it over for another more substantial debts up to £100K.” month is very high and the temptation is (Interview, Debt Adviser) to take a further loan to repay the first.” (eConsultation, Debt Adviser) rolled over loans People who are unable to repay often ‘roll debt recovery over’ their debt. A rolled over loan is when Having monitored complaints over a six the customer renews the loan when month period the OFT found that the repayment is due.

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