Meeting the needs of borrowers
After a flurry of announcements on payday lending over recent weeks, I have been reflecting on options for borrowing. My conclusion is, as usual, that it’s complicated.
Payday lenders are going to be more tightly regulated, so we are told. This is long overdue. There are many horror stories of people with multiple and spiralling debts because they have used payday loans which have become out of control. In some cases normally entirely law abiding people have turned to crime, such has been the desperation.
So what is to be done? The news that payday lending will be better regulated is obviously welcome. The prediction that many will go out of business will not cause swathes of the population to lose sleep. Does this mean though that there will be a gap in borrowing facilities?
As a society, we feel the need to provide whatever services people want. If there is a market we should fill it. Somebody, somewhere will provide the service. That may be the case, but I wonder at what cost?
There have been many calls for credit unions to step up to the plate and replace payday lenders. The Financial Conduct Authority recently raised the cap on credit union interest rates. They can now charge up to 3% a month (42.6% APR) which pales into insignificance when compared to the 4000%+ APR that payday lenders charge. Of course not all credit unions will charge this maximum and those that do will only do so when they need to – when the loan is seen to be ‘risky’.
The trouble is that credit unions are there to provide ‘affordable and appropriate’ credit. They are not allowed, by their rules and the regulation, to lend to people who clearly can’t afford to repay their loan. Apart from being risky, lending to someone who can’t afford to repay is unethical, which doesn’t sit well with the credit union ethos. This is the conundrum that we face; how do we help people to meet their financial needs without sending them into spiralling debt.
The answer is simple to state, but extremely difficult to achieve. It is about a balance of people learning to manage their money lives better and having affordable and appropriate financial products for them to use when they need them.
To hear more on my views on this topic, listen to an interview that I’ve given on SoundCloud.