All those happy cheery sites, on
television, on Google, on the back of buses, all telling us how marvelous their
payday loan is and how quickly you can get the money.
While I am fully aware that we live in an
instant gratification world where everything must be delivered immediately, be
that food (Mac Donald’s, Burger King, KFC) or communication with friends
(Facebook, My Space), mobile phones, texting all instant; TV programs – notice
how every program has an introduction that basically tells you what is going to
happen in the program. Everything is immediate and now, never is the story wait
and be patient.
Now don’t get me wrong, I do like a fair
bit of the instant delivery world, I love getting my pizza delivered exactly
when I say it should be delivered and I love the way that I can download any
book in seconds to my Kindle, but I am not sure that we should be setting
expectations that loans will be delivered within 15 minutes. Ok so Payday Loansare advertised as emergency cash and by definition an emergency needs urgent
attention, but the consequences of getting that “emergency cash” should be
carefully considered and you can’t do that in 15 minutes.
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The loan agreements, both written by the
lenders and demanded by regulators, make painful reading, page after page of
lawyer produced “protect the writers butt” wording that no sane man or woman
would ever admit to understanding have to be agreed to before the loan can be
issued. I have read more than my fair share of these documents and there is no
way on earth that these could be read in less than an hour or two. So how can a
lender rely on a document that is almost impossible to understand and also
guarantee to get the money into your account in 15 minutes? The reason is
because the law lets them. The average lender really does not care if you have
read and understood the documents and the implications of taking that loan. They
need you to say that you have read the Terms and Conditions and that you fully
understand them and the moment you have ticked that box to say you have, you
are committed and the lenders responsibility ends. They just want you to take
the loan, extend it a few times and pay it back. They do not want you to think
about the 30% per month interest, or the £5.50 transfer fee or the £25 penalty
fee that you will incur because you could not pay on time.
There is a lot of talk with the industry
about lenders undertaking Affordability Checks with the applicants. Some sites
are taking this seriously but it seems that most are still totally relying on
the consumer to decide if they can afford the repayments. I think we can all
picture the poor customer, needing emergency cash and carefully considering if they
can afford the repayments – I don’t think so! They need cash and they will
worry about paying it back at a later stage, just not now. The responsibility
must fall to the lender and they should be forced to undertake true
affordability checks.
An affordability check should be part of
the application and the inputs given by the applicant should be used as part of
the decision making process undertaken by the lender. The check should not be a
stand-alone piece of data, it should be embedded in the application form and
should be crossed checked with other data such as the applicants credit file.
If the affordability checks show that the applicant cannot afford the
repayments they should either be rejected or offered a lower amount of money.
Whilst this may upset the applicant at the
time of the application, it will stand them in a much better position on the
day the repayment becomes due. After all, it is better to think you need £300,
be offered £150, survive and manage to make the repayment rather than be allowed
the £300 and default on the loan because you really have no way of making the
repayment.
Unfortunately, a lot of lenders want the
customer to borrow as much as possible regardless of the customer’s ability to
repay. As long as they can get the customer to pay the interest each month they
really do not care what position the customer is in financially. The best
possible customer for a payday lender is one who never pays off the capital but
just keeps rolling over the loan each month, paying just the interest. This way
they cover their exposure on the capital and acquisition costs (advertising,
data costs etc.) in a couple of months (typically four months) and then the
rest is bottom line profit.
Another trick of the lenders is to offer
top up loans. What they will often do is watch a customer rollover or make a
few repayments to the instalment loan or make a few payments to the line of
credit and then they will contact the customer and offer a top up loan or an
increase in the customers line of credit. Often this is done without any
additional affordability checks, so even if the lender undertook checks as part
of the original application they don’t bother on subsequent loans or top ups.
This is really unfair on the customer as they may well have been managing their
finances and it is the lender who pushed them over the edge into the cycle of
debt.
The sad thing is that there really is a
role and place for payday loans and payday lenders, but greed has driven these
companies to exploit their customers without even realising it. If the lender
just thought about the impact of their greed and desire they would have a far
happier customer base and probably have a far more successful business.
The regulators in the UK are planning on
bringing in tougher requirements for UK lenders offering Payday Loans and I am
sure that affordability will form a large part of the new regulation. I just
hope that they regulator takes a balanced view and ensures that customers need
to be responsible as well as the short-term lenders.
About the author:
Kieran Moulden is the Founder and Managing
at Fidelity Works which owns a number of instalment loan brands including
TheMoney.Co (www.themoney.co) a company offering instalment loans over 3, 6 or
9 months, with fixed repayments and no fees, just daily interest.
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