Let’s talk about payday lenders

The decline of short term lenders

Short-term lenders, often known as payday lenders, are financial companies that can lend applicants small amounts of money quickly and generally over a shorter period of time.

You may have heard of a few infamous short-term lenders such as Wonga, Sunny, Lending Stream and Quick Quid. You may also be aware that some of these lenders have ceased to exist due to their inability to cope with compensation claims and complaints.

Short-term lenders are most commonly used by people who need cash urgently, or struggle to access finance through other companies due to their poor credit history. One short-term lender advertises that they can have cash in your bank within 10 minutes, but the quick availability of cash doesn’t come without a cost. The interest rate an applicant is charged usually depends on their credit file. Wonga once charged up to 5,853% on their loans, before interest rates were capped in 2015!

In 2014 the FCA took over the regulation of short-term lenders. They brought in rules to stop the lenders being able to charge customers more than double what they originally borrowed. Whilst this did reduce the cost of borrowing for many people, an interest rate of up 1,500% can still be charged. In comparison, the highest APR that can be legally charged on a credit union loan, in the UK, is 42.6% APR. Many charge a lot less. (No1 CopperPot’s highest interest rate is 12.68%).

More people now appear to be turning to their credit unions for financial help. Abcul reported that from 2010 to 2019, credit union loans had increased by a huge 98% and membership had grown by 60%. However, the short-term lending market has seen a sharp decrease in recent years. In 2018 there were around 30-40 short term lenders on the market, a drastic difference to the 200 lenders that were in the market in 2013 and 2014. Wagestream says that if lenders continue leaving the market at the same rate, there will no longer be any firms offering short term loans by the end of 2022.

There is no denying that sometimes people need to borrow money and do this quickly. With short-term lenders on the decline, credit unions may be able to help those who would once have turned to these types of lenders by potentially offering lower cost credit options and promoting regular saving.