The high cost of credit

By Laura Rodrigues, Senior Public Policy Advocate

Yesterday the Financial Conduct Authority (FCA) announced that it’ll be reviewing high-cost credit, such as payday loans and overdrafts. This is very welcome.

We regularly see families who struggle to get by on tight budgets and have to pay a premium to borrow money for essential living costs. The cost and design of these credit products can trap these families into cycles of repeat borrowing and lead to debts spiralling out of control.

Regulating the payday loan market

From 2014 the FCA undertook a range of measures aimed at curbing the worst excesses of the payday loan market, including the introduction of a price cap on the cost of these types of loans. Since then there’s been a large contraction in the market and falling numbers of people getting into payday loan arrears. This suggests that fewer people are being offered credit that they cannot afford to repay.

Our own figures also reflect this trend, with significantly fewer people coming to the charity for help with payday loan problems: 23% of our clients had payday loan debts in 2013 compared to 16% so far in 2016. However, there are still issues with payday loans that the FCA needs to tackle. Our recent research found persistent problems with people accessing multiple loans, and poor treatment of customers in financial difficulties.

Other forms of high-cost credit: unarranged overdrafts

The FCA review on high-cost credit is also welcome as it acknowledges that overdrafts, specifically unarranged overdrafts, can be a form of high-cost credit. We recently found that our clients are facing average charges of £225 per year in unarranged overdraft fees, pushing them further into debt. This review provides an opportunity to examine what more can be done to prevent short-term borrowing options becoming long-term persistent debts.

The regulator has acknowledged the need for a price cap on payday loans and in the credit card market there are already caps on default charges. There’s a clear need for the FCA to consider the case for limiting the amount banks can charge for accessing unarranged overdrafts as short-term borrowing, and tackle persistent overdraft debt.

Affordable credit alternatives also needed

There’s a broader question for the FCA and for the Government to address alongside this review. Who do the most financially vulnerable turn to when they need to borrow money for essentials and emergencies? What happens when the boiler breaks down, or they need new school uniforms for their children?

The FCA’s price cap on payday loans has rightly moved towards restricting access to this type of high-cost credit and only allowing it to those who can manage to repay. But this also leaves very few options for those unsuitable for these types of credit. The Government must look at how to better support the financially vulnerable through the provision of more affordable alternatives to high cost credit, including looking at international examples of no and low interest loan schemes.

A broad look at the continuing issues in the high cost credit market encompassing many different products is welcome. It’s essential that measures must be taken to tackle the detriment consumers continue to face with payday loans, overdrafts, credit cards and other forms of higher cost short-term borrowing.