The lending of money has always been a controversial topic
There is always a risk that a borrower will not pay back the loan, leaving the borrower in debt whilst the lender loses their money. So, we start in a difficult place. However, credit is a part of everyday life and allows many to live their lives in the way they would want to.
In more recent years there has been no greater controversy than that around short-term lending, and particularly the ’payday’ product, which unsurprisingly, is a loan you repay on your payday.
We have heard a lot about the growth of the gig economy, and the fact that many people are never quite sure about what their wages will be from month to month. For some, there is a reliance on overtime or the temporary work that another family member can bring into the home. Lots of people have to manage those peaks and troughs in their finances, whatever their income.
So, it is not necessarily a new idea, and for decades if not hundreds of years, there have been lenders that meet this need. Some of those firms have grown up in Yorkshire to become lenders that serve the entire UK.
That is not to say that there haven’t been any problems, and The Yorkshire Post has carried stories over the years about short-term lending.
The market and the sector have changed dramatically over the last few years. Products have changed, as has the customer base. More importantly, there are clear examples of a new lending culture.
In very short-term lending, the prices are now capped by the regulator and people pay less to borrow. Whilst the average amount of these small loans continues to stay around £300, they tend to be repaid over three months rather than on a single payday.
Figures from the Financial Conduct Authority show that people are less likely to find themselves in financial difficulty, but if they do then any fees are also capped and they are more likely to receive help. Our own industry data shows that the number of people paying default fees has halved in recent years.
However, readers of The Yorkshire Post will have seen articles about the number of complaints against short-term lenders that have increased in recent years. Surely this points to continuing problems? Well no, any analysis of this spike in complaints will point to two things.
First, many of these complaints date back several years. The peak of the payday market was back in 2012 through to 2014, and that is where these come from. Second, we have become the target of claims management companies. Nearly nine in 10 complaints to firms are generated by these companies, most of which are automatically escalated to the Financial Ombudsman Service as they can do so at no cost to the CMC.
What is more worrying is that the Financial Conduct Authority, the new regulator of claims management companies, has already raised concerns about the abuse of data and talked about fraudulent claims. We will see whether that sector reforms its practices.
In the meantime, it is clear that there is a demand for consumer credit that can help people live their lives. Whilst we protect those that need our support, and should always be ready to offer forbearance, we also need to ensure we do not reduce access to credit.
Short-term lending may be criticised by some, but for many, it is a lifeline that allows them to manage their family finances. It allows them to deal with unexpected expenditure or drops in income, to smooth their finances. Even small amounts over a short period allow them to manage planned expenditure.
Jason Wassell is the chief executive of the Consumer Finance Association