Payday lending is controversial. There are those lawmakers who think we should regulate it out of existence and I was happy to engage with them in a debate I helped secure on the subject yesterday in Parliament.
I take a more pragmatic view. The truth is that the payday lending market exists because there is a demand for it. For some, mainstream lending doesn’t suit their needs (small loan for a very short period of time), others don’t have access due to a poor credit rating. We could regulate it out of existence, but the demand would remain and borrowers would be driven into the hands of illegal loan sharks. This would help no-one, least of all the consumer.
Instead, we must reform the payday lending market so that it works in the interests of consumers, including some of the most vulnerable consumers in society.
The fundamental challenge is the lack of information. For a market to work effectively and for consumers to take the lead, the market needs to provide them with as much information as possible. Most crucial to this is accurate pricing information so consumers can make a choice based on cost.
The payday lending market fails to give sufficient information. You only have to watch adverts on the TV to see this. “Quick Cash Quid Shop, in 15 minutes, in your pocket”. The focus and competition between lenders in on convenience, not on price. The price is hidden in the small print as an undecipherable APR and consumers are led into making decisions based on distorted information.
I am calling for the Government to step in to force all payday lenders to display the costs of their loan in cash terms, conforming to a common unit, say the cost of borrowing £100 for one day. That way, consumers can make quick and easy price comparisons between lenders, ensuring they are getting the best deal and encouraging price competition – and therefore lower prices – in the market.
There are other areas too where more information would be of benefit. Financial Education (which I have secured in the National Curriculum) and independent debt advice would go a long way to help consumers deal with the information they are given. Real time credit checking would enable lenders to make better decisions about who they lend to. Giving the Regulator more power to investigate would improve information about the good lenders and the bad ones. Forcing lenders to feed back information into the rating system would give consumers a route back to mainstream credit by repairing their credit rating.
For the modern consumer, information is king. We must ensure that consumers get the information they need to put them in the driving seat.
