Payday loans

What is payday loans?

• Instalment loans

  Here, a borrower takes out a loan with multiple repayments, which are usually made monthly. The term of the loan can vary – and we see a range of repayment arrangements, ranging from two repayments up to around 12 or sometimes more. Some lenders also allow overlapping loans, so their customer will be able to take out further loans whilst they’re still repaying a previous loan.

• Equal instalment loans

  A specific type of instalment loan. The total amount repayable is spread across the whole term equally, so each month the customer will repay the same or similar amount. This means the customer is paying interest and making payments towards the capital.

• Varied repayment instalment loan

  The amount the customer needs to pay differs from month to month, usually with the highest amount being due in the second or third month.
  

• Repayment loans with balloon payments

  The customer only repays the monthly interest each month until the last repayment date when they must pay back the total amount borrowed and the last month interest. Sometimes, this is referred to as a “payday loan with deferred repayment option”.

• Revolving credit (also known as flex credit or running credit)

  This is an open-ended credit agreement, which allows the borrower to make multiple draw-downs as long as it's within the credit limit. Although there’s no fixed end date, the credit is only meant for short-term use because of its high interest rate. Loan agreements may include a hypothetical repayment schedule over 10 months.

What we look at

When someone contacts us about short-term lending we’ll ask:

• Did the business do everything it was required to do?
• And if they didn’t, has their customer lost out as a result?

Our answer to a complaint will reflect what’s fair and reasonable in the circumstances. And in considering what’s fair and reasonable, we’ll consider relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what we consider to be good industry practice at the time.

In light of this, for short-term lending we’ll ask questions such as:

• For each loan, did the lender carry out reasonable and proportionate checks to satisfy itself that the potential borrower would be able to repay the loan in a sustainable way?
• If they didn’t carry out these checks, would reasonable and proportionate checks have shown that the borrowing could have been repaid sustainably?
• Given this type of loan is intended for short-term use only, did the overall pattern of lending increase the indebtedness of the person involved in a way that was unsustainable or otherwise harmful?
• Did the lender act unfairly or unreasonably in some other way?

Although this information isn’t exhaustive, there are a number of key laws, rules and standards that lenders need to consider – and which they and we will need to take account of when looking into complaints from their customers.

In summary, it’s clear from both the OFT’s Irresponsible Lending Guidance and the FCA’s Consumer Credit Sourcebook (CONC) that both regulators required an assessment of affordability which was proportionate – to determine if a prospective borrower would be able to repay their loan. And both regulators provided guidance that lender could consider when completing this assessment.

In addition, both regulators have stressed that these products aren’t suitable as a longer-term source of credit – and that there’s potential for consumer detriment if they are used in this way.

• The Office of Fair Trading (OFT) and the Consumer Credit Act 1974

  Before April 2014, the regulator for this type of credit was the OFT.  The Consumer Credit Act 1974 (CCA) set out the factors which the OFT needed to consider when deciding whether to give a business a consumer credit licence.

  The OFT also asked lenders to complete a borrower-focussed assessment of affordability. This was to see if the prospective borrower could afford to repay the money in a sustainable manner. This is set out in the OFT’s March 2010 guidance for creditors for irresponsible lending.

  There was no set list of checks a lender needed to complete. But the checks should have been proportionate to the circumstances of each loan. This could include considerations about the amount borrowed and the prospective borrower’s borrowing history. Section 4.12 of the Irresponsible Lending Guidance gave examples of the types and sources of information a lender might want to consider. In 2011, an assessment of creditworthiness also came into force in the CCA.

  Repeat lending

  Section 6.25 of the OFT’s Irresponsible Lending Guidance said, in relation to short-term loans, that it would be a deceptive and/or unfair practice (which in the OFT’s view may constitute irresponsible lending practices) if a lender were to repeatedly refinance (or 'roll over') a borrower's existing credit commitment for a short-term credit product in a way that is unsustainable or otherwise harmful.

  Section 6.25 also said:

  • the OFT considers that this would include a creditor allowing a borrower to enter into a number of separate agreements for short-term loan products, one after another, where the overall effect is to increase the borrower's indebtedness in an unsustainable manner
  • the general purpose of short-term loans, such as 'payday loans', is to provide borrowers with a cash advance until their next pay day and they are usually about 30 days, or just over, in duration (however, in certain circumstances, the borrower can elect to 'renew' the loan for a fee and delay payment for a further agreed period of time)
  • the purpose of payday loans is to act as a short-term solution to temporary cash flow problems experienced by consumers (they are not appropriate for supporting sustained borrowing over longer periods).

• The Financial Conduct Authority

  The FCA took over the regulation of consumer credit from the OFT in April 2014.

  The Consumer Credit Sourcebook (CONC) part of the FCA’s handbook refers to sections of the OFT Irresponsible Lending Guidance (including section 6.25).

  CONC is clear about the need to complete a “credit worthiness assessment”, considering the potential for the lending commitment to “adversely impact the consumer’s financial situation”. (CONC R 5.2.1 (2)). CONC replaced certain sections of the CCA including:

  • from July 2014 the FCA introduced a rule that high-cost short-term lending couldn’t be refinanced on more than two occasions (unless exercising “forbearance” – to help a borrower in financial difficulties). This is set out in CONC 6.7.23. R.
  • on 2 January 2015, the FCA introduced a price cap on the interest and charges short-term lenders can charge. This came into force from 2 January 2015.

  The main points of the FCA price cap are:

  • daily interest and fees must not exceed 0.8% of the amount borrowed
  • default fees should be no more than £15 in total
  • the total interest, fees and charges (including those on any connected agreement) shouldn't be capable of coming to more than the amount borrowed

  There is more detail in CONC 5A. CONC 5.2.3 [G] outlines that the assessment the lender needs to complete should be dependent on, and proportionate to, a number of factors – including the amount and cost of the credit and the consumer’s borrowing history.

  CONC 5.2.4 [G] gives guidance on the sources of information a lender may want to consider as part of making a proportionate assessment. And CONC rules specifically note and refer back to sections of the OFT’s Irresponsible Lending Guidance.

  Looking in particular at repeat lending CONC 6.7.22G says:

  • a firm should not allow a customer to enter into consecutive agreements with the firm for high-cost short-term credit if the cumulative effect of the agreements would be that the total amount payable by the customer is unsustainable

  This guidance specifically refers back to ILG 6.25.