The payday loans market has been under scrutiny for almost as long as it's been around, and it's just been the subject of a 20-month long competition investigation to determine how borrowers can get a better deal. Well, the results are in, and it's hoped that the new measures will shake up the market for the better.
The Competition and Markets Authority (CMA), the body behind the investigation, published its final report earlier today, and has set out a number of measures that are designed to increase price competition between lenders to ensure a better, fairer outcome for customers.
These include the requirement for lenders to publish details of their products on at least one price comparison website, provided it's been authorised by the industry regulator, the Financial Conduct Authority (FCA). These sites should provide customers with clear, objective and comparable information on all potential loan costs, with the loans being displayed in such a way that they can be filtered according to the most relevant features (such as loan amount or duration) so customers can easily compare the cost of a loan.
However, this isn't the only measure to be introduced. The CMA has also recommended that the regulator take steps to improve the disclosure of late fees, help customers shop around without affecting their ability to access credit, improve real-time data sharing between lenders and credit reference agencies, and ensure that lead generators (websites that sell potential borrowers' details to lenders, often to the highest bidder, rather than matching borrowers with the most suitable loan) clearly explain how they operate and prevent bias.
As a final measure, lenders will be required to dramatically improve communication and transparency with their customers. They'll be ordered to provide existing customers with a summary of their borrowing costs, outlining the total cost of their most recent loan, the cumulative costs of borrowing over the previous 12 months, and how late repayment affected their costs.
All in all, it's hoped that the measures will tackle the huge number of problems identified within the payday industry, particularly the lack of competition between lenders, which has led to higher costs for borrowers. The report found that most borrowers don't shop around, partly because of the difficulties in accessing clear and comparable information on the cost of borrowing, but also down to a lack of awareness of late fees and additional charges.
Competition is a key means of lowering the cost for the consumer in a whole range of industries, but without the pressure to drive down costs, payday lenders have tended to price their loans at similar levels while competing on other factors, such as speed of application, which is often the initial priority for borrowers.
Simon Polito, chair of the investigation group, said: "The payday lending market is undergoing substantial change as a result of FCA initiatives. Our actions complement these and are aimed at making the market more competitive and further driving down costs for borrowers.
"Most customers take out several loans a year and the total cost of paying too much for payday loans can build up over time. During our investigation, we found that there was often a substantial difference in this market between the most expensive and cheapest deals... Only price competition will incentivise lenders to reduce the cost borrowers pay for their loans."
The latest measures follow the FCA's introduction of a price cap for the sector which came into force in January, and is in addition to a number of other initiatives that have been introduced over the past year. It's hoped that, with these combined measures, the sector will begin to work more effectively for borrowers who are forced to seek this kind of loan – but they still shouldn't be the only option.
These loans still come with a high price and have the potential to lead to financial difficulty, not to mention the fact that they can leave a serious mark on your credit profile, with some mortgage providers being known to refuse applications if an applicant has used a payday loan in the past. A far better (and more cost-effective) solution is to stick to traditional offerings, so use our loan calculator to see if you could borrow at a more affordable level.
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