Concern over the alternatives to payday loans
By Laura Rodrigues, Senior Policy Advocate
The financial regulator (the FCA) have been asking for evidence on payday loans, overdrafts and other forms of high cost credit.
Today, we’ve submitted our response to them which shows that while fewer people have come to us with payday loan debts since FCA action back in 2015, we’re still seeing some outstanding issues in payday lending. We’re also calling for action on overdrafts including a cap on unarranged overdraft charges.
But what other forms of high cost loans are available at the moment? What harm can they cause borrowers, and what else needs to be done about them?
1. Rent to own
Rent to own companies allow customers to buy household appliances e.g. a cooker or fridge in weekly or monthly repayments. This sector has grown rapidly in recent years and concerns have been raised that vulnerable households are paying over the odds for essentials, and can face having them repossessed.
The All Party Parliamentary Group on Debt found that the total cost of a rent to own deal with interest can be two or three times the cost of paying outright for that item. The group also found that 50% of customers experience repayment problems. Part of the increased cost can be attributed to the added extras like compulsory ‘extended warranty-style’ service cover.
We think the time has come for the FCA to ban these expensive compulsory warranties from being a condition of rent to own credit agreements.
2. Guarantor loans
These loans require the borrower to have a second person, often a family member or friend, to act as the guarantor for the loan. This person becomes liable to pay off the loan if repayments are missed.
We’ve seen a significant increase in clients coming to us with guarantor loan debts. In 2016 over 10,000 clients had these debts, compared to fewer than 650 in 2012. There are issues around these loans, particularly with guarantors not fully understanding what they are signing up for and how much they’ll have to repay.
The FCA has taken some measures to address this, but we’re still concerned that lenders are not always fully checking that guarantors will be able to repay if a loan is in defaulted on.
We’ve asked the FCA whether guarantors should only be liable for the original loan amount, not the added interest and charges they currently can face.
3. Home credit or ‘doorstep loans’
These are small cash loans where the lender calls at your home to collect repayments. Home credit loans are consistently among the most common consumer credit debts we see with 8% of our clients having these debts in 2016.
There’s been a previous inquiry into these loans, with a range of concerns raised, particularly around the financial incentives which lenders use to encourage borrowers to ‘rollover’ and repeat borrow loans.
The question for the FCA is whether the regulations on payday loans should also be applied in this market. This includes whether there should be a limit on the number of times these loans can be ‘rolled-over’.
4. Logbook loans
This is an old-fashioned form of lending where loans are taken out secured on an asset, usually the borrower’s car. If borrower struggles with repayments, their car can be taken away and there’s little or no protection to stop this. Borrowers don’t always realise that this is the case and it can leave them without transport for work, or for taking their children to school.
The Law Commission has called on the Government to reform the law so that borrowers can better understand complicated logbook loan agreements and lenders can only take the car if they have a court order.
We think it’s essential that these proposals are taken forward and that the FCA ensures logbook lenders are properly assessing whether financially vulnerable borrowers can afford to repay their loans.