Borrowers who need short-term credit are advised to seek alternatives to payday lenders, despite steps taken by the UK competition watchdog to make loans more affordable.
Last week, the Competition and Markets Authority proposed that payday lenders be required to list their loans on price comparison sites.
One of the objectives is to encourage new lenders to undercut the rates offered by the larger ones, which can exceed 5,000% per annum.
However, many existing small payday companies could close their doors due to a cap on the cost of credit that will take effect early next year, according to the Financial Conduct Authority. Of the 400 businesses offering payday loans, 397 are likely to close, the FCA said.
Concerns are growing that fewer lenders mean less choice for borrowers, despite measures to stimulate price competition.
FCA figures show 1.6 million people took out 10 million short-term loans last year, worth £ 2.5 billion. Many take out more than one payday loan per year, with the average customer taking out six.
However, experts argue that other, cheaper forms of credit are being overlooked. “The important thing to think about is whether you have to borrow at all,” said James Daley, founder of Fairer Finance, a consumer rights organization.
“A lot of people are drawn to the temptation of quick credit, but you should ask yourself if you need it. Credit tends to be better if it is planned and for the longer term.
He said payday loans were once considered the “lender of last resort,” but have now become the first choice in many cases, due to the ease of access.
Alternatives include credit unions, which offer more affordable loans and help borrowers improve their credit scores.
As nonprofits created by members of a community, such as an industry or local region, loan rates are significantly lower than payday lenders and are capped at 42.6% per year. year.
Over a million people are members of around 500 credit unions, but the number of borrowers is expected to triple over the next 10 years.
Karin Christiansen, general secretary of the Co-operative Party, which is spearheading the growth of the sector, said more needs to be done to prevent people from reaching the point where they need a payday loan.
The party was calling on employers, in the public sector first and foremost, to educate employees about debt and the role of credit unions, she said.
“We also need to start educating young people about debt,” she added.
Borrowers with poor credit histories who view payday lenders as their only option may opt for “credit repair” credit cards, which can allow them to get a loan while improving their outlook.
“These cards are for people with poor credit history who have encountered an obstacle on the road,” said Sylvia Waycot of consumer site Moneyfacts.
“They provide the money, but also limit the amount you can borrow. If you run it right and pay back the money every month, you start to repair your credit history and then go back to the mainstream.
Certain credit cards, low-cost bank overdrafts and secured loans are other ways to get short-term credit, says Andrew Hagger, personal finance expert at Moneycomms.
“Forcing payday lenders to register on price comparison sites is a positive step, but there is still a lot to be done, especially to publicize cheaper alternative sources of borrowing,” he said. declared.
“Just because someone doesn’t have a clean credit history doesn’t mean payday loans are the only option; they can be quick and convenient, but that’s where the benefits end.
He gives the example of Tesco Bank, which offers a Foundation credit card with a representative annual percentage rate of 28.9%. “By making payments on time each month, your credit score will gradually increase over time,” he said.
“Another profitable option is a guarantor loan offering credit of between £ 500 and £ 5,000 at a representative annual rate of 49.9%,” he said.
Borrowers should find a creditworthy friend or relative to stand surety in the event of inability to repay.
Banks are also strengthening their presence in this area.
Les Matheson, head of personal and business banking at the Royal Bank of Scotland, recently told the Financial Times that people use payday lenders because they are simple and fast.
“We should be able to find a way to make loans available so quickly – in minutes, rather than hours or days or weeks,” he said.
Some wonder if the demand for short-term credit will survive even if much of the supply disappears.
“We didn’t have a market for illegal £ 1bn loans before [payday lending] – it just wasn’t happening, ”said Mr. Daley of Fairer Finance.
“Payday lenders have surprised people with how quickly and easily it is to get credit and it’s become a big temptation. “
He said it was “right” that the convenience industry be restricted and that the remaining lenders must meet “the legitimate needs of a small minority.”
“If you are really in a crisis and you can’t get it done, then payday or short-term credit delays the inevitable; it’s best to ask for support from a charity, ”he said.