Mat Lawrence: How to build alternative to payday loans

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THE economic downturn might be coming to an end but one sector has been doing very well all along. The payday lending industry has more than doubled in the space of a few years to be worth over £2bn.

Its growth is emblematic of what is wrong with our recovery. Debt-driven and unsustainable, the success of 
payday lenders is not the foundation for renewed prosperity. But more than that, we know that the growth of the payday lending industry represents a deeper problem of unfairness: those with the least are now paying the most, simply 
to get by.

New polling for a report by IPPR called Jumping the Shark shows that the majority of loans are used to pay for basic essentials. The average payday loan user has a household income of less than £25,000.

Not only are payday loans very expensive – up to £35 for £100 borrowed – the industry often operates in a predatory way. As the Office of Fair Trading made clear when it referred the sector to the Competition Commission, too often consumers are ripped off.

The Government has recognised, belatedly, that something must be done. The new regulator of the consumer credit market, the Financial Conduct Authority, has been given the power to cap the total cost of credit.

This marks a victory for common sense as well as for campaigners across the country who have fought for a limit on the amount so-called “legal loan sharks” can charge. But regulation alone is not enough if we want to provide an affordable, sustainable alternative.

Even if we see sustained wage growth, millions of people will still need an extra cash injection for life’s emergencies. They deserve something better than to rely on payday lenders.

This is why our report argues that as well as a new legal cap on the total cost of credit, Britain needs a new generation of local not-for-profit affordable lenders with enough capital, technical support and geographic coverage to compete with firms like Payday Express, Quick Quid and Wonga.

We argue that this should be funded by a one-off levy of £450m on Britain’s £180bn consumer credit industry. Payday lenders are only a small part of a wider market, such as doorstep lending, overdraft facilities, and store cards, that too often rips people off.

That is why we think that it is fair that a levy is applied on the entire industry, based on the amount of consumer harm the National Audit Office found the sector to have caused in just one year. Based on the principle of “polluter pays”, with the largest, most harmful firms paying most, this is a reasonable way to raise money to fund an alternative.

Rather than just seeing that money disappear into the Treasury pot in London, we think that money should be used to capitalise democratic, locally-rooted not-for-profit lenders, such as credit unions, housing associations or community banks. Supported by a new national Affordable Credit Trust that would support local lenders, following a successful model used in America or Canada, and partnering with bodies like the Post Office, the Church of England and local councils, they could provide a real alternative to high cost credit in towns and cities across Yorkshire.

Research shows the new system could provide loans of £3 for every £100, almost £30 cheaper than a payday alternative. By adopting the successful repayment mechanism of the old Budgeting Loan of the Social Fund, costs could be kept low and passed on to the borrower, rather than the pockets of payday lenders. Combined with a savings incentive targeted at low and middle income households, paid for by reform of high income pension tax relief, we can begin to build a stronger, more equitable and democratic savings and lending network.

Of course, we could choose not to act, to hope that regulation will solve the problem of people paying so much for the most basic essentials. But while regulation is of course vital and a big step forward, it can only do so much. Unless we do more, payday lenders and other high cost credit providers will continue to flourish.

Instead, Britain needs to expand the provision of affordable credit as well as to create a new ‘match saving’ incentive scheme for squeezed households. Only by building a stronger asset base of their own can working people reduce their reliance on expensive credit.

• Mat Lawrence is a research fellow at the Institute of Public Policy Research which has published a new report entitled Jumping the shark: building institutions to spread access to affordable credit.