Byrne, Noreen

McCarthy, Olive

Cork Open Research Archive

UCC Library and UCC researchers have made this item openly available.Please let us know how this has helped you. Thanks!Title Payday loans: clampdown was vital, but credit unions must expand aftercoronavirus to fill gapAuthor(s) McCarthy, Olive; Byrne, NoreenPublication date 2020-09-04Original citation McCarthy, O. and Byrne, N. (2021) ' Payday loans: clampdown wasvital, but credit unions must expand after coronavirus to fill gap’, 20September. Available at: https://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583Type of publication Article (non peer-reviewed)Link to publisher'sversionhttps://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583Access to the full text of the published version may require asubscription.Rights © 2020, Olive McCarthy and Noreen Byrne. Originally published onThe Conversation. This article is made available under the terms ofthe Creative Commons Attribution-NoDerivatives 4.0 International(CC BY-ND 4.0) licence.https://creativecommons.org/licenses/by-nd/4.0/Item downloadedfromhttp://hdl.handle.net/10468/12440Downloaded on 2022-05-18T20:14:45Z21/01/2022, 11:05 Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gaphttps://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583 1/4Academic rigour, journalistic flairPayday loans: clampdown was vital, but credit unions mustexpand after coronavirus to fill gapSeptember 4, 2020 5.51pm BSTOlive McCarthyDirector, Centre for Co-operative Studies (on research sabbatical leave), University College CorkNoreen ByrneActing Director, Centre for Co-operative Studies, University College CorkThe cost of accessing small personal loans can be eye-wateringly high for those who need it most.Take the UK, where a £200 loan from Provident Personal Credit over 13 weeks costs £86 in interest.That’s an equivalent APR of a whopping 1,557.7%.These offers are available even after the caps on payday loans that the UK introduced five years ago.In the months after the reforms, the Financial Conduct Authority (FCA) reported that the number ofloans and the overall amount borrowed was down 35%. From there, the decrease continued: there were 5.4 million high-cost loans totalling £1.3 billion in 2018 with the total amount repayable at £2.1billion; five years earlier, there had been 10.3 million loans worth £2.5 billion.After the pandemic, borrowing is set to skyrocket. Hananeko_Studio21/01/2022, 11:05 Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gaphttps://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583 2/4Yet clearly, high-cost credit has not gone away entirely, and it looks set to get bigger again. Provident,the UK and Ireland’s largest high-cost doorstep credit provider, is anticipating increased demandwhen unemployment rises as the UK furlough scheme winds down. The lender has reportedly putaside £240 million for a surge in defaults.So what have we learned since the rules changed, and will those who need credit be able to access it inthe wake of the pandemic?To cap or not to cap?High interest rates are usually justified by the argument that the borrowers are more likely to default,often having been turned down elsewhere. Higher rates compensate the lender for higher risk.Be that as it may, payday loans companies earned a reputation for predatory lending, especially afterthe last financial crisis. The UK’s restrictions set a cap on interest and fees at 0.8% of the outstandingprincipal per day, and a maximum total cost of 100% of the amount borrowed.This mirrored a global trend. In Germany, for example, the maximum permissible APR is twice themarket rate as calculated by their finance regulator, [BaFin]. In France, it’s 1.33 times the market rate.The primary intention has been to make credit more affordable for vulnerable consumers. Thisfollows clear evidence that most high-cost credit customers are in a low income category, with poorcredit histories and low financial resilience, meaning they may struggle to cope well with financialsetbacks.They often borrow on the basis of convenience and whether they can afford the repayments, ratherthan the cost of the loan. This can lead to financial strain, repeat borrowing and defaults. After all,credit is debt.Nonetheless, the debate continues among policy experts worldwide about whether caps are the bestresponse. Supporters point out that restrictions have reduced the cost of credit for low-incomeborrowers, tackled over-indebtedness and helped to prevent people from being exploited.Some consumers may no longer have access to credit because of providers changing their businessmodels or exiting the market, but many of these people would probably not pass a rigorousaffordability check and may be over-indebted already.Opponents highlight the possible unintended consequences. As well as less access to credit, theyworry about the potential for more illegal moneylenders, and loans companies introducing chargesthat circumvent the restrictions.Customer borrowing from The Money ShopHigh-cost credit is linked with low-income consumers. Thinglass21/01/2022, 11:05 Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gaphttps://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583 3/4Swayed by these arguments, Ireland is among a minority of European countries to favour increasingregulation and supervision over caps. For example, high-cost warnings in loans advertising became arequirement from September 1. Although the government is reviewing its general approach, the fearthat restrictions will cut the credit supply still appears to have the upper hand.What the evidence saysAn OECD report from 2019 found that interest-rate caps have reduced exploitation and over-indebtedness, made short-term loans cheaper, and reduced defaults. However, the OECD cautionedagainst excluding riskier consumers from formal credit, since they might borrow from lenders incountries with looser rules. This has happened in the Netherlands, for example.Similarly, the FCA review of 2017 found that the UK restrictions had led to cheaper loans and fewerdebt problems. And it saw little evidence of consumers turning to illegal moneylenders. Our own research in 2017 agreed about the cheaper loans, but warned that they must be accompanied bymeasures to make more affordable alternatives available and support consumers in making goodcredit decisions.Credit unions are one of the few alternatives, as the FCA has acknowledged. They aim to buildconsumers’ financial resilience by lending at affordable rates, encouraging regular savings andoffering financial education and information. This helps to improve borrowers’ credit records.There are about 440 credit unions in the UK, with 2 million members and rising. Loans to memberspassed £1.5 billion in 2018, exceeding that of high-cost loans.Currently, UK credit unions are permitted to charge up to 42.6% APR, a far cry from the permissiblerates for high-cost providers. Yet penetration is low relative to the total population at about just 3.5%.We need to expand the reach of credit unions and enable a greater online presence to support farquicker lending decisions.Fair4All Finance, an organisation funded by the government from dormant accounts, has begunsupporting credit unions to build capacity but funding is limited and mostly only offered in England.An expansion would be valuable.Scaling up the affordable alternatives has certainly never been more pressing. Provident reports thatits customer numbers have fallen in 2020 after it tightened its lending practices, but this might bebecause consumer spending is down, together with increased saving and government support inresponse to the COVID-19 pandemic. The picture could look very different in a year’s time.Woman choosing between different credit cards.Many people are living on endless refinancing. Bacho21/01/2022, 11:05 Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gaphttps://theconversation.com/payday-loans-clampdown-was-vital-but-credit-unions-must-expand-after-coronavirus-to-fill-gap-145583 4/4Boosting credit unions would also challenge the new breed of digital lenders, which are armed withpeople’s personal data to nudge them to borrow more. This new form of lending will be morewidespread across socio-economic groups, rather than simply a poor person’s problem, and will likelybe harder to regulate because it will cross international borders. Governments’ support for thepandemic has been essential, but they must think about the increased demand for lending that is onits way.

Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gap

https://cora.ucc.ie/bitstream/10468/12440/1/Payday%20loans_%20clampdown%20was%20vital%2c%20but%20credit%20unions%20must%20expand%20after%20coronavirus%20to%20fill%20gap.pdf

Payday loans: clampdown was vital, but credit unions must expand after coronavirus to fill gap

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