UK Payday Lending Report Reviews Debate and Policy Options

Payday lending in the UK:
a review of the debate and

policy options
Damon Gibbons, Neha Malhotra, and
Richard Bulmore
October 2010
Centre for Responsible Credit, 3rd Floor, Inclusion, 89 Albert Embankment, London SE1 7TP
Tel: + 44 (0) 207 582 7221 Fax: + 44 (0) 207 582 6391
Email: admin@responsible-credit.org.uk
Acknowledgements
The authors would like to thank Veronika Thiel at the Centre for Responsible
Credit for her helpful comments on an earlier draft of this report. However, the
responsibility for any omissions or errors remains our own.
Payday lending in the UK
Contents
Acknowledgements
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Chapter One: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Chapter Two: Background to the payday lending industry . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Chapter Three: The payday debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Chapter Four: Policy responses in the United States and Canada . . . . . . . . . . . . . . . . . . . . .25
Chapter Five: Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Appendix A: Comparison of a payday loan to various unauthorised bank overdrafts . . . . . .32

Appendix B: US state level payday lending regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Executive summary
Payday loans are small loans provided for short term periods, usually until the borrowers next pay date. Loans are
sold both in high street premises and online. Typical costs range from 12.00 per 100 for those borrowed on the
high-street to 34.14 per 100 for loans taken out online. Loans sold in high street premises usually involve the
customer receiving physical cash in the premises, and repaying using a post-dated cheque that they leave behind at
the time the loan is taken out. Where loans are sold online the money is transferred electronically to the customers
bank account at the time of application approval, and repayment is also taken electronically, either by debit card or
direct debit at the agreed later date. Both online and high street loans therefore require the customer to have the
use of a bank account for repayment purposes.
Due to the short term nature of the loans, the APRs are extremely high ranging from 334% to 4,400%. However,
the use of the APR calculation for very short term loans has been criticised for exaggerating the cost of borrowing
relative to other forms of credit, particularly unauthorised bank overdrafts where the costs are not required to be
expressed as an APR percentage.
The cost of payday loans is nevertheless high relative to authorised overdraft credit and to small sum credit card
borrowing, where this is cleared within three months. Further to this, the costs of borrowing from payday lenders
can increase rapidly if borrowers elect to defer loan repayments beyond the original repayment date.
Many payday lenders allow loans to be deferred or rolled over beyond the original repayment date provided the
borrower pays another months fees and charges. The way that these roll over loans are handled varies between
payday loan providers, with the best current practice operators limiting the number of roll overs allowed. However,
some lenders place no limits on the number of times a loan can be rolled over, significantly lengthening the repayment
period and dramatically increasing the overall cost of the credit.
Having originated in the US, the industry subsequently expanded into the UK in the late 1990s and has grown
rapidly. Five of the seven largest payday lenders in the UK are owned or controlled by US companies, and it is
currently estimated by the Office of Fair Trading that the industry makes over 900 million of loans in the UK per
year.
Payday loan customers are typically single, without children, and have incomes of over 1,000 per month. The
average size of an initial loan is between 230 and 300, but repeat customers are offered higher amounts of up to
1000. This suggests that payday loans are provided to a higher income demographic than customers served by other
forms of high-cost credit, for example, by home credit or door to door moneylenders.
Despite this, there are concerns that some payday customers could become trapped in a cycle of repeat borrowing
because:
The costs of the credit are high, particularly when loans are rolled over
Some borrowers do have low incomes, with lenders making loans available to people with net incomes of just
750 per month (equivalent to a gross yearly income of approximately 10,300).
Payday lenders advertise their products by comparing their charges to unauthorised overdraft fees, indicating that
some borrowers are likely to have exhausted this line of credit and that they could already be in financial
difficulties.
These concerns have recently been reinforced by qualitative research undertaken by Consumer Focus. This found
that lower income consumers were particularly at risk of getting into financial difficulties and could become caught
up in a cycle of increasing indebtedness.
However, the research also found that for some, mainly higher income, borrowers the use of payday loans did not
cause problems.
In addition, the recent Office of Fair Trading High Cost Credit review highlights that payday loans meet a demand
for easy access to credit, and fill a gap not currently met by mainstream lenders. The Office of Fair Trading also
reports evidence that some lenders exercise forbearance when customers experience payment problems and that
the level of consumer complaints is low.
Further to this, payday lenders themselves argue that their costs are reasonable when compared with unauthorised
overdraft charges, bank fees for returned direct debits, and with interest charges on revolving credit card balances, and
that their pricing structure is more transparent than these other forms of borrowing, with no hidden costs to the consumer.
Indeed, consumers relying on their bank to provide an unauthorised overdraft face considerable uncertainty.
Whether or not pending payments, such as direct debits, will be met remains at the discretion of the bank and
there may be situations where payments are returned unpaid, which incur additional bank charges. The level of
charges that will be applied by the bank are often difficult to calculate and will vary significantly depending on individual
circumstances such as the number of direct debits returned or the amount and duration of the unauthorised
overdraft, if this is granted.
In order to progress the debate and inform possible regulatory and self regulatory action in the UK, this report
examines the two central issues:
Whether payday loans are expensive relative to other forms of borrowing, particularly in relation to the cost of
unauthorised overdrafts and banks charges, and
Whether there is evidence of consumers becoming trapped in a cycle of repeat borrowing.
We also review the regulatory and self regulatory actions being taken in the US and Canada and highlight variations
in existing practice in the UK market.
ARE PAYDAY LOANS EXPENSIVE?
We compare the cost of payday loans to unauthorised overdraft charges from five high street lenders and find that
whilst very small sum payday loans will often be cheaper than an unauthorised overdraft, this is not generally the
case once loan sizes begin to exceed 250 to 300. We find that whether or not a payday loan will be cheaper than
an unauthorised overdraft depends on:
The charging policies of the bank concerned
The amount of loan being sought, and
The level of the specific payday lenders charges.
Likewise, where an unauthorised overdraft is not granted by the bank, and the alternative to a payday loan is having
direct debits returned unpaid, then the fee charging policies of individual banks are important as are the number of
likely returned transaction costs that will be incurred.
As a result, we find that those payday lenders who state, without equivocation, that their loans are a cheaper
alternative to unauthorised overdrafts and bank charges could be misleading some of their customers.
However, in some cases payday loans are a cheaper alternative to these forms of borrowing, and taking out a payday
loan also offers the borrower greater certainty than relying on a bank using its discretion to allow the use of an
unauthorised overdraft.
We also compare payday loans to small sum credit card borrowing and find that payday loan charges are significantly
more expensive. This position is only reversed where relatively high credit card balances have accrued (in excess
of 1,000) and are unlikely to be cleared within a short period, or where an account has gone into arrears.
DO PAYDAY LOANS TRAP PEOPLE IN A CYCLE OF

REPEAT BORROWING?
Payday lenders require borrowers to be in employment and have access to a bank account. As a result, loans are
not offered to the very poorest consumers. Nevertheless, loans are available to people with net incomes of just
750 per month. This, combined with the fact that payday loans are advertised as an alternative to exceeding
overdraft limits and incurring bank charges, suggests that some loans are offered to low income consumers who are
likely to have, or are already, experiencing financial difficulties.
This concern is reinforced by some cases reported by Citizens Advice, and by recent qualitative research conducted
by Consumer Focus, but there is little quantitative information available concerning how big a problem this may be
and Citizens Advice has itself noted that payday lending accounts for a very small proportion of their overall debt
work.
We therefore find that there is a danger that some customers could be using payday loans inappropriately but that
further work is required to accurately determine the scale of this problem.
In the US and Canada there has also been an active debate about the impact of payday lending on default rates and
bankruptcies. The evidence here appears to be finely balanced with some studies indicating that payday loans help
people to manage occasional financial crises and to avoid defaulting on bill payments, whilst others appear to link
payday loan use with increased bankruptcy filings.
It is clear that much greater access to payday customer data has been made available to researchers in the US than
in the UK. We consider that it would help ensure confidence in the industry if a similar level of data transparency
was provided here also, and that further research in this area needs to:
Accurately establish the income distribution of payday borrowers in the UK
Track users of payday loans and report on the overall impact of payday borrowing on their finances over time,
relative to non payday loan users with similar characteristics
Examine how much credit card and authorised overdraft borrowing has already taken place prior to the use of
payday loans
Consider in further detail the relationship between payday lending, credit defaults and insolvencies.
In the interim, we consider that the most responsible payday lenders would want to take steps to ensure that they
reduce the risk of people with ongoing financial problems using their products inappropriately. They will also want
to take full account of the recent Office of Fair Trading guidance with regard to irresponsible lending. Indeed, some
lenders have already put in place one or more of the following measures:
Restrictions on the number of roll over loans that they will grant to a customer,
Limits on the amount of loan relative to the borrowers available income,
Limited or eliminated default charges and put in place policies to freeze interest at an early stage.
Unfortunately, these best practices are not shared across the entire industry, and, there are some lenders who
continue to engage in practices which appear to contradict the Office of Fair Trading guidance, for example by failing
to limit the number of times that a loan can be rolled over. We also find a lack of transparency concerning default
charges on some online payday lending websites.
WHAT ARE THE REGULATORY OPTIONS?
Reviewing the regulatory approaches in the U.S and Canada, as well as industry codes of practice in these countries,
we find that:
Fifteen states in the US have prohibited payday lending altogether either by introducing a ban on this form of
lending or by introducing a cap on the maximum charge for credit which can be made and setting this at a low
level, making the payday lending model unviable.
Thirty five states in the US and eight provinces in Canada have introduced legislation which allows payday lending
to take place. However, these laws frequently include a cap on the maximum charge for credit. Caps have been
set at a sufficiently high rate to allow payday lenders to operate, for example at $21 - $23 per $100 lent in a
number of Canadian provinces.
Payday lending laws in the US and Canada also incorporate measures to ensure responsible lending, notably
placing restrictions on:
the amount of loan relative to the borrowers income
the number of loans that can be provided in any given period
the absolute maximum level of loans.
the number of times a loan can be rolled over
the level of fees that can be charged for overdue loans
It is also notable that members of the Canadian Payday Lending Association have signed up to a complete prohibition
on roll over lending.
Although we recognise that the UK payday customer base may be broader than that in the US, where there has been
a particular concern about payday stores concentrating on very low income communities, we consider that many
of the measures adopted in the US and Canada could usefully be adopted by regulators, and the industry itself, here.
In the UK, the recent Office of Fair Trading high-cost credit review has noted that there may be a lack of effective
price competition, but has rejected the use of caps on the cost of credit and has not referred the market to the
Competition Commission. It has, however, noted that it will continue to monitor prices moving forwards. We
welcome this but urge the Office of Fair Trading to make this information publicly available on a regular basis.
The Office of Fair Trading has also made a number of other suggestions, including that:
Payday lenders could provide better information to credit reference agencies about the payment performance
of their customers which would allow those with good repayment records to more easily access mainstream
credit in the future, and
Payday lending associations could establish codes of practice which:
include clear standards for dealing with complaints,
provide rules of thumb to guide typical loan amounts
limit the number of roll over loans,
include guidance to ensure misleading advertising is avoided, and
make sure that people know who owns each payday lending brand.
We agree with these suggestions, but consider it to be important that any industry led code of practice should be
based on best practice both from the UK and abroad. We therefore make the following recommendations for such
a code:
Advertising of payday loans should make clear that loans are an expensive form of borrowing and blanket
statements that loans are cheaper than bank charges or going over-limit on an overdraft should not be used
A clear multiple of maximum loan value to income, such as the 25% rule used in some of the US states, should
be introduced to restrict loan sizes
A limit on the number of roll over loans should reflect existing best practice. The Canadian Payday Lending Association
demonstrates that responsible lenders are capable of accepting a complete prohibition on roll over lending
The code should also incorporate clear rules regarding the treatment of overdue amounts and should restrict
default charges and freeze interest at an early stage when accounts are in default
Efforts should also be made to prevent people from obtaining multiple loans from different payday lenders, for
example by increasing data sharing amongst payday lenders.
However, not all lenders are members of the trade associations and there is a need for the Office of Fair Trading
to immediately review the lending policies of some lenders in this market against their irresponsible lending guidance
issued in March of this year. In particular, it is difficult to see how those lenders who roll over loans as the default
option or who allow an unlimited number of roll over loans are following the Office of Fair Trading guidance.
The level of some payday loan charges may also indicate that lenders are providing loans to people with an
unacceptably high level of default risk, and therefore calls into question whether or not they are lending responsibly.
One means of preventing the taking of excessive risks would be to limit the cost of credit that can be charged by
lenders. This approach has been adopted with industry support in a number of Canadian provinces, where some
payday lenders have welcomed the introduction of caps at around the $23 per $100 level, and caps are also used
by many US states.
In the UK, the Coalition Government has indicated that it intends to introduce a power for regulators to define and
ban excessive prices in the credit and store card markets and we consider it would be appropriate for them to
widen the scope of that commitment to include the payday lending market.
However, we accept that clear criteria would need to be provided by Government for regulators to consider
whether and how to use such a power. A possible set of considerations would comprise:
Whether other measures, for example remedies designed to increase price competition, could address the
problem within twelve months. Regulators should be required to review progress and use their power to cap
prices in the event that no improvement in price has been achieved through the use of other remedies within a
year
The level of any price cap, with regulators required to balance:
The desirability of maintaining access to affordable and responsible credit and the likely impact of the cap
on its supply
Levels of consumer detriment caused by a lack of price competition and the amount of the reduction in price
that could be achieved by the imposition of a cap for the majority of borrowers in the market
The estimated enforcement costs of the proposed cap
The desirability of eliminating clearly excessive risk taking by lenders in the market.
The form of the cap. Regulators should be tasked with constructing caps in such a way as to prevent lender
avoidance and pricing distortions
We note that the Office of Fair Trading itself has not been supportive of price capping, and accept that a possible,
albeit a likely more expensive and complex alternative to enforce, would be to use its irresponsible lending guidance
as a means of eliminating excessive risk taking. We would therefore welcome further details from the Office of Fair
Trading as to how it will ensure that its guidance will be enforced in the payday lending market to achieve this, for
example by indicating a level of charge which could be taken as prima facie evidence of irresponsible lending practice
and used as the basis for targeting its enforcement action.
We also consider that greater competitive pressure could be be brought to bear on prices by requiring banks to
reduce charges for returned direct debits and to be pro-active in identifying people in financial difficulties, including
by offering access to mainstream small sum credit provision to people on low to middle incomes. We identify the
Small Dollar Loan Pilot, organised by the Federal Deposit Insurance Corporation in the US, as a model of good
practice in this respect. The pilot has demonstrated that banks can offer commercially viable alternatives to payday
loans, and that these are especially effective when customers are also provided with access to simple savings products
and financial education.
We therefore recommend that regulators pursue the creation of a similar pilot in the UK. This could also be used
to test out whether direct bank provision of small sum loans, combined with financial education and access to simple
savings products, would be better placed to meet the needs of payday borrowers than other affordable credit
options, for example Credit Unions and Community Development Finance Institutions.
A summary of our final recommendations is provided in the box below.
Summary of Recommendations
Responsible payday lenders should ensure that their advertising of the costs of payday loans relative to bank overdrafts and
charges is balanced and warns consumers that whether or not it is cheaper to take out a payday loan will depend on who
they bank with and their individual circumstances. The Office of Fair Trading and Advertising Standards Authority should
review all current payday loan advertising and take action as appropriate on this point.
The Office of Fair Trading should launch an immediate review of the practices of the highest cost payday lenders against
the responsible lending guidance and also take enforcement action against firms which fail to limit roll over lending.
Further research is required to examine whether the majority of payday borrowers have already exhausted their overdraft
limits or have accrued significant credit card balances and should look into the relationship between payday lending use,
credit defaults, and insolvencies in more detail.
The Financial Services Authority and Office of Fair Trading should encourage British banks and credit card companies to
establish a small sum credit pilot targeted at customers who have exhausted their overdraft limits and are struggling to pay
down credit card debts, which provides loans to help reschedule commitments together with financial education and access
to simple savings products
Approved codes of practice should be developed, in consultation with consumer groups, which include the following commitments from the industry:
That maximum loan values will not exceed one quarter of monthly income as is the case in some US states.
That multiple, repeat, and roll over lending will be avoided
That borrowers in financial difficulties are provided with assistance to reduce their level of debt without incurring
additional charges.
The industry should increase levels of data sharing in order to facilitate price competition for good customers and to avoid
problems of multiple borrowing
Government should commit to expanding the scope of its proposed price capping powers for regulators to all areas of the
credit market. It should consult on the criteria to be considered by regulators when deciding whether or not to use this power.
Chapter One: Introduction
Payday loans are small cash advances provided for short term periods, usually until the borrowers next pay date.
Loans are sold both in high street premises and online, and typical costs (expressed as the total charge for credit)
range from 12.00 per 100 borrowed on the high-street to as high as 34.14 per 100 borrowed online (Office of
Fair Trading, 2010, Annex E, para 3.2). Due to the short term nature of the loans, the APRs are extremely high and
range from 334% to over 4,400% (Office of Fair Trading, 2010, Annex E, para 8.27). At the time of the loan application
the borrower either provides a post-dated cheque or authorizes a subsequent electronic transfer of funds from
their bank account in order to allow the lender to withdraw the full sum due from the account on the agreed
repayment date.
Borrowers are often also able to elect to pay another months interest and fees in order to defer or roll over the
repayment of the principal for a further period. This can make the cost of payday borrowing very expensive as
charges quickly accumulate and can even exceed the amount borrowed within five or six months. The way that roll
over loans are handled varies between payday loan providers, with the best practice operators limiting the number
of roll overs allowed, whilst some other lenders make rolling over the loan the default option.
There has been considerable growth in the payday lending market in the UK in recent years and the market is
currently estimated to turn over more than 900 million of loans per annum (Office of Fair Trading, 2010, Annex
E, para 2.3).
In its recent high-cost credit review, the Office of Fair Trading recognises (Office of Fair Trading 2010, p.5) that
payday loans, alongside other forms of high-cost lending, do meet a demand for credit, and fill a gap not currently
met by mainstream lenders. The Office of Fair Trading also reports evidence that some lenders exercise forbearance
when customers experience payment problems and that the level of consumer complaints is low.
However, there are concerns (Citizens Advice, 2009, p. 5) that payday lending is contributing to over-indebtedness
amongst lower income consumers. Qualitative research with 20 payday loan customers conducted by Consumer
Focus research earlier this year (Burton 2010, pp 23-24) reports that low income users had a long term negative
experience, and that payday borrowing has substantial knock-on effects, causing people to struggle with other
commitments such as paying minimum monthly repayments on credit cards or overdrafts, and resulting in additional
charges. As well as causing financial problems, some of the respondents also said the experience of trying to pay
back payday loans, particularly after having let them roll over or taken out multiple loans, had caused them emotional
stress and anxiety.
The industry also attracts criticism because of the high APR rates associated with its loans. In March 2008, these
concerns were raised in Parliament with 51 MPs signing a motion calling for an inquiry into the industry,1 and media
reaction to the high APR figures charged by payday lenders has included calls (Collinson, 29th May 2010) for the
introduction of interest rate caps. Most recently, the End Legal Loan Sharking campaign, which is being coordinated
by Compass, has led to an Early Day Motion signed by over 100 MPs calling for caps to be introduced.2
In contrast, payday lenders argue (see for example, British Cheque & Credit Association 2010) that the APR
measurement inflates the price of small sum, short term lending and provides a distorted picture of the true cost of
their loans. They further argue that their product provides a necessary and cheaper alternative to high bank charges
and penalty fees, and that they act responsibly by ensuring that people can afford to repay prior to making any
advance (for example, the Payday UK website contains a clear statement committing it to responsible lending).
Nevertheless, regulators are taking a keen interest in payday lending both here in the UK and abroad. In the US, where
the payday lending model originated, the federal Government has imposed a cap of 36% on rates for payday advances
to military personnel and a number of states have introduced payday specific legislation involving combinations of caps
1
2
See http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=35515
See http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=41619&SESSION=905
on interest rates, restrictions on the amount of loan relative to income, and limitations on the number of times a loan
can be refinanced. These approaches have also been taken in a number of Canadian provinces.
Here in the UK, the Office of Fair Trading has recently completed a study of high-cost credit markets, which included
payday lending. Its final report, published on 15th June 2010, rejected the use of interest rate ceilings but retains some
concerns that the payday lending market, particularly the online market, may not be subject to effective price
competition, because:
Suppliers primarily attract customers with the convenience and speed of the application process rather than by
competing on price terms
Payday loan suppliers own a number of different brands where the ultimate parent company is not always clear,
and this can inhibit the ability of consumers to shop around
For online payday loans there are a number of lead generator websites which, together with the proliferation
of brand names, may make the market appear more competitive than it actually is and which make it difficult for
consumers to compare prices as details of the cost are only provided once an application has been received.
The Office of Fair Trading also indicated that a lack of effective price competition may arise because of relatively low
levels of financial literacy amongst borrowers and a lack of other, more affordable, options including difficulties in
obtaining mainstream credit, for example authorised bank overdrafts. It notes that addressing these deep seated
problems would require a long term programme of activity and commitment from Government. However, some
shorter term measures are also recommended, including:
Working with industry groups to provide greater information on price comparison websites, and considering
whether legislation is required to create a single website allowing consumers to compare the features of home
credit, payday, and pawnbroking loans alongside credit unions and other lenders in their local area
Considering whether there is scope under the European Consumer Credit Directive for a requirement that
high-cost credit suppliers must include 'wealth warning' statements on advertisements for high-cost credit
Working with credit reference agencies to explore ways in which payday lenders and could provide suitable
information to credit reference agencies about the payment performance of their customers, in turn allowing
those with good payment records to use mainstream lenders more easily in the future
Supporting payday lender trade associations to establish a code or codes of practice covering best practice policy
in a number of areas. Such a code could include:
complaints processes and advice to customers
rules of thumb on typical limits for amounts to lend to consumers guidance on avoiding misleading consumers
through advertisements, and
policies on rolling over of loans
steps to ensure that consumers are aware of the ultimate owners of brand names.
The Office of Fair Trading has also indicated that it intends to continue to monitor loan volumes and prices in the
high-cost credit sector to inform future policy making (Office of Fair Trading, 2010, p.7).
Although the High Cost Credit Review rejected the use of price caps on the grounds that these would be expensive
to administer, the Coalition Government has made a commitment to providing a power for regulators to define and
ban excessive prices in the credit card and store card markets. Expanding the scope of this power to other areas
of the credit market which have been identified as lacking effective price competition may therefore make sense,
and is the subject of a wider campaign to End Legal Loan Sharking being led by Compass .
The publication of Office of Fair Trading guidance on responsible lending practice earlier this year (Office of Fair
Trading 2010a) is also important. The guidance covers the entire process of lending from the advertising of products,
through to assessment of affordability, and debt recovery, and includes specific information concerning acceptable
practice relevant to the payday lending industry in these areas.
The remainder of this report further examines the central issues in the payday lending debate in respect of the cost
of loans and whether people become trapped in a cycle of repeat borrowing. In order to provide possible options
for further action in the UK we also undertake a review the regulatory and self regulatory approaches being taken
in the US and Canada. It is structured as follows:
Chapter two provides a brief background to the development of the payday lending industry in the UK and the
regulation of its provision.
Chapter three sets out further detail of consumer criticisms and lender arguments in defence of payday loans,
including a comparison of the costs of a typical payday loan with unauthorised overdrafts, and bounced direct debit
fees, and with the cost of borrowing on credit cards.
Chapter four reviews the regulatory options being pursued in the United States and Canada, including initiatives
to expand mainstream credit alternatives to payday lending, and compares this to current lending practice in the UK.
Finally, chapter five sets out our conclusions and provides a number of recommendations. We believe that a
number of these could be progressed on a voluntary basis by the industry and could form the basis of approved
Codes of Practice. However, we also indicate where we consider further regulatory action and research is now
required.
The End Legal Loan Sharking campaign particularly focuses on the Home Credit market, which was subject to a Competition Commission
inquiry in 2006. This confirmed that there was a lack of effective price competition but its remedies have been ineffective and the cost of
credit per 100 borrowed has increased significantly in the past four years (see Gibbons & McCartney, 2008).
3
Chapter Two: Background to

the payday lending industry
The payday lending model originated in the US where it is generally considered to be a form of sub-prime lending,
as payday customers often have cash flow difficulties and few, if any, lower cost borrowing alternatives (Flannery &
Samolyk, 2005, p. 1). For example, Stegman (2001, p.17 - 19) raises concerns that payday lending stores are
concentrated in low income neighbourhoods and that levels of repeat borrowing demonstrate that some families
with fragile finances can become addicted to payday loans.
In the 1990s, the payday lending model was exported to the UK, and its expansion here has in large part been
generated by US lenders establishing a direct presence.
A clear example demonstrating the success of this model is The Money Shop, which is owned by Dollar Financial,
a US based lender. The Money Shop has expanded from one store in 1992 dealing primarily with cheque cashing to
273 stores and 64 franchises across the UK in 2009 and payday loans have become a major source of its revenue
(Dollar Financial Corp, 2009, p. 8). In addition, whilst reporting record financial results in May of this year the
company also indicated that it sees the UK market as an opportunity for additional rapid store expansion.4
US based companies have also established online payday lending operations in the UK. Indeed, as we show in the
box below, the majority of the main payday lending operations in the UK are either owned by US companies or have
received considerable investment from the US and are answerable to US shareholders.
Of the seven companies highlighted by Consumer Focus (Burton 2010, p. 12) as the largest market operators, only
two are not ultimately owned by American companies: the pawnbrokers H&T Pawnbrokers and Albemarle & Bond.
However, even Albemarle and Bonds largest shareholder is EZCorp, the second largest pawnbroker in the US.
Ownership of UK Payday Lending Operations
The Money Shop and Express Finance (Bromley) Ltd, which trades as PayDay Express, are owned by Dollar Financial Corp,
incorporated in the US. According to Consumer Focus, Dollar Financial supplied 25% of all payday loans originated in 2009.
MEM Consumer Finance (which owns the Month End Money, PayDay Now, PayDay UK, PayDay store, Quicksilver and
PayDay Loans brands) is ultimately owned by Compucredit Holdings, a company incorporated in the US. Compucredit
Holdings is a sub-prime lender that lends to Americans underserved by mainstream banks.
Quick Quid, the second largest online lender, is owned by CashEuroNet UK LLC, a Delaware company.
Lending Stream Ltd, an online payday lender, is owned by Global Analytics Holdings, another Delaware company.
Cash Centres, the second largest high street lender, is owned by Check n Go, a company incorporated in the US.
National Cash Advance, with 21 high street branches across the UK, is owned by Advance America Cash Advance
Centers, incorporated in the US.
High profile lender Wonga.com Ltds holding company, Quickbridge (UK) Limited, has various shareholders, including
several investment funds, notably Accel Investments, a Silicon Valley venture capital provider, and Balderton Capital, the
European arm of Silicon Valley venture capitalists, Benchmark Capital. Wonga also obtained start-up capital from Silicon
Valley bank.
Of the seven companies highlighted by Consumer Focus (Burton 2010, p. 12) as the largest market operators, only two are
not ultimately owned by American companies: the pawnbrokers H&T Pawnbrokers and Albemarle & Bond. However, even
Albemarle and Bonds largest shareholder is EZCorp, the second largest pawnbroker in the US.
10
See http://phx.corporate-ir.net/phoenix.zhtml?c=177357&p=irol-newsArticle&ID=1422164&highlight=
However, the UK payday customer base may be broader than that of the US. One of the UK payday lending trade
bodies, the Consumer Finance Association,5 estimates that the average value of a payday loan is 230 and that payday
loan customers have annual gross incomes of between 12,500 and 30,000, with 18,000 the approximate average.
The Office of Fair Trading (2010, Annex E, pp. 15 - 24) estimates a slightly higher average loan of 300 but also
reports a typical user to be a young single man in rented accommodation earning in excess of 1,000 per month.
It is certainly true that payday loan customers are unlikely to be the poorest consumers. The payday product requires
that borrowers have a bank account from which repayments can be withdrawn automatically on the due date, and
that borrowers provide evidence that they are in employment. Repayment dates are also set to coincide with the
clearance of wages into the bank account as a means of reducing default risk. Consumers who are unemployed or
otherwise without work are therefore not eligible for the loans.
Nevertheless, it is also clear that the payday customer base in the UK does include low to moderate earners.
Research conducted by Policis for the Friends Provident Foundation, and cited in the Office of Fair Tradings HighCost Credit Review (Annex C, p. 36), finds that 10.4% of payday customers have incomes of less than 11,100 per
annum, and that 49.1% of all customers have incomes of less than 19,200 per year.
There are also concerns that some borrowers may already have exhausted other lines of credit and may not be able
to afford further borrowing. The Office of Fair Trading (2010, Annex E, p.16) cites findings from research conducted
by Policis for the Friends Provident Foundation which indicates that lower income payday loan customers use the
product because they are cash constrained, need to cope with an emergency or pay an urgent bill, or are struggling
to keep up with mortgage, rent, or utility payments.
Indeed, the Office of Fair Trading goes on to indicate (2010, Annex E, p.17) that payday lenders appear to appeal
directly to potential borrowers who have already exhausted their bank overdraft limits by using their advertising to
compare their charges to those that would otherwise be incurred through unauthorised overdraft borrowing.
Online Payday Lending
The Office of Fair Trading (Office of Fair Trading, 2010, Annex E, p. 22) reports that online lenders serve a
different type of customer compared to borrowers through high-street stores, as these are more likely:
to make multiple online applications, because the number of declined applications is high, and
to prefer the anonymity and convenience offered by online lenders.
Online lenders have also been found by the Office of Fair Trading to charge higher prices than their counterparts
on the high street, partly as a consequence of their higher exposure to potential fraud.
Demand for payday lending may also be set to increase further as banks and credit card companies become more
selective as a consequence of the financial crisis and tighten their lending criteria. Indeed, there are some early signs
that non bank, and non credit card, lenders are becoming more important as sources of consumer credit. Data from
the Bank of England (2010, table c, p.2) indicates that the overall amount of consumer credit debt held by banks fell
by 5.5 billion between May and December 2009 whilst the outstanding amounts held by other consumer credit
lenders remained stable over this period at 96.5 billion. This had the effect of increasing the overall share of
consumer credit balances for these non bank or building society lenders from 41 to 42.5 per cent. It is also notable
that, as at December 2009, credit card balances represented just 24% of all outstanding consumer credit debt
compared to 29% in December 2005.
See http://www.cfa-uk.co.uk/aboutcfa.html
11
REGULATION OF PAYDAY LENDING IN THE UK
Whilst there is no payday specific regulation in the UK, payday lending is regulated by our general consumer credit
legislation.
The Consumer Credit Act 1974 requires lenders to obtain a consumer credit licence from the Office of Fair Trading.
Operating without a licence can result in a fine and/or imprisonment. Before a lender is issued with a licence, the
Office of Fair Trading determines whether the lender is a fit person. To determine this, the Office of Fair Trading
considers a range of factors including the lenders business practices, any previous consumer complaints and any
offence or conviction of violence or dishonesty. If, after issuing a licence, the Office of Fair Trading determines that
a lender is no longer fit, it has the power to revoke the lenders consumer credit licence.
Further to this, the Consumer Credit Act 2006 (S. 25 (2B)) introduced an explicit requirement for the Office of Fair
Trading to consider irresponsible lending as a factor in determining the overall fitness of a lender to hold a consumer
credit licence, and guidance on this was issued to the credit industry in March 2010.
Key aspects of the guidance include requirements to:
Clearly state the total cost associated with obtaining a loan and include the APR in any advertisement
Lend responsibly and ensure that they assess the borrowers capacity to repay a loan in a sustainable manner,
this includes the ability of the borrower to repay the loan without having to take out an additional loan;
Provide borrowers with a sufficient explanation of the credit product, this should allow the borrower to
understand whether he can afford the credit and also any risks associated with the credit product;
Advise whether a product is better suited for the short term rather than for long term borrowing;
Clearly explain to consumers the effects of rolling over a loan and lenders should not roll over a borrowers
existing credit commitment for a short term credit product in a way that is unsustainable or harmful; and
In an online environment, a borrower should not be allowed to enter into a credit agreement until they have been
provided with an adequate explanation about the features of the credit agreement and been provided with an
opportunity to question the lender.
Finally, there have also been a small number of adjudications by the Advertising Standards Authority (ASA) with
regard to payday lending:
In April 2008 the ASA upheld a complaint against the payday lender, the Money Shop for using advertising which
suggested that the use of high rate, short-term credit was suitable to fund aspirational, non-essential purchases
such as a party, a shopping trip or a holiday. The ASA ruled that this was likely to be seen as encouraging carefree, impulsive and frivolous spending on credit and concluded that the advertisement could encourage consumers
to spend borrowed money irresponsibly
In October 2009, the ASA upheld a complaint against the online payday lender Quickquid, for failing to include
the APR of 2,000% in its TV advert. The ASA ruled that the APR had to be disclosed as the advert emphasised
the speed of the loan process and that this constituted an incentive for people to take up their offer
In July 2010, the ASA upheld a complaint against online payday lender Wonga.com Ltd for portraying the act of
taking out a loan in an overly whimsical fashion, including using laughter when the suggestion was made that a
bank may offer a better alternative. The failure to give greater prominence to the APR than other information
presented in the ad concerning the cost of borrowing also caused it to breach the Consumer Credit
(Advertisements) Regulations 2004.
12
INDUSTRY ASSOCIATIONS
In addition to the activities of regulators there are two industry bodies representing payday lenders in the UK, the
British Cheque & Credit Association and the Consumer Finance Association, both of which impose rules on their
members. However, the extent of these rules is currently limited.
The British Cheque & Credit Association (BCCA) acts as an industry body for unsecured loan products
where the intended repayment period is 6 months or less6 (but excluding pawnbroking and home credit). The
BCCA has issued guidance on best practices for payday lenders and these include a requirement that its members
should not issue more than six consecutive loans to a borrower (Office of Fair Trading, 2009, p. 24). However, it
should be noted that details of this membership requirement is not available from the BCCA website, and the BCCA
has not obtained approved status from the Office of Fair Trading under its scheme for quality assuring codes of
practice.
The Consumer Finance Association (CFA) which has members of both high street payday lenders and lenders
who operate predominantly online. The CFA does not currently have a code of conduct. It does, however, state that
it encourages high standards from its members in terms of transparency, customer service and responsible lending.7
6
7
BCCA website (http://www.bcca.co.uk/index.asp) accessed on 17th July 2010
CFA website (http://www.cfa-uk.co.uk/aboutcfa.html) accessed on 17th July 2010
13
Chapter Three:
The payday debate
.Concerns about payday lending centre on two main issues (i) the cost of loans, and (ii) whether payday lending
traps consumers in a cycle of increasing indebtedness. Payday lenders have defended themselves against both of
these criticisms, for example by arguing that their pricing structure is justified by high operational costs and that they
are responsible lenders. This chapter provides an assessment of the evidence on both sides of these arguments.
ARE PAYDAY LOANS EXPENSIVE?
The APR rates associated with payday loans are extremely high. For example, a typical loan of 230,8 taken out
for 30 days, with a loan fee of 57.50 has an equivalent APR of 1355 percent. Indeed, the Office of Fair Trading
reports that APRs can reach over 4,400%.
However, there appears to be some agreement (Office of Fair Trading 2010, p.23) between consumer agencies and
the industry that APRs are a poor measure of the actual price of a payday loan, as the APR is an annualised
compounded rate and hence becomes higher as the loan period becomes shorter.
Whilst APR may not be a helpful measurement of price, there nevertheless remain concerns that the cost is still high
when compared to other forms of lending, notably overdraft and sub-prime credit cards to which the payday lending
customer base is likely to have at least some level of access.
For example, table 2, below, sets out the costs of borrowing 100 on sub-prime credit cards available from Capital
One, Vanquis Bank, and with Barclaycard Initial.
Table 2: Selected sub-prime credit card products cost of credit over 90 days
Purchase amount ()
Loan period
Interest free period^
Maximum credit limit^ ()
Annual purchase rate^ %
Monthly purchase rate^ %
Minimum repayments^ ()
Fees^
Annual or monthly fee/s
Other fee/s
Total cost of credit over 90 days ()
Capital One
100
90 days
56 days
1500
34.94%
2.53%
10
2.70
Vanquis Bank
100
90 days
56 days
1000
39.94%
2.84%
10
3.03
Barclaycard Initial
100
90 days
56 days
2000
29.90%
2.21%
10
2.36
^ Interest rates and fees as at 28 April 2010. Interest rates may differ for cash advances. Interest rates are typical, and may differ depending on
individual circumstances - can be up to 59.9% for the Vanquis Visa Card. Minimum repayments can be affected by credit balance, maximum credit
limit, and individual circumstances. Interest free periods may vary between credit card providers.
14
This is the typical loan size cited by the Consumer Finance Association on their website.
As with other credit cards, borrowing which is cleared in full within the initial 56 day period does not attract any
interest. But even where the borrower fails to clear the outstanding amount within this time-frame the costs are
significantly lower than borrowing on a payday product for low amounts.
It should also be noted that these cards also have relatively small credit limits attached to them. For example, the
Capital One Classic card provides a starting credit limit from as little as 100, and is available to people with poor
credit scores and a pre-existing history of County Court judgments. It is therefore reasonable to assume that many
payday customers would have access to these products.
Further to this, although the use of these credit cards for cash advances is more expensive than for purchases, the
costs are still significantly lower than payday borrowing over a 90 day period (see table 3, below).
Table 3: Cost of 100 cash advance over 90 days on selected sub-prime credit cards
Cash advance amount ()
Loan period
Interest free period
Maximum credit limit ()
Annual cash advance rate^ %
Monthly cash advance rate %
Minimum repayments^ ()
Fees^
Annual or monthly fee/s
Other fee/s
Total cost of credit over 90 days ()
Capital One
100
90 days
0 days
1500
34.94%
2.53%
10
3% of advance
10.99
Vanquis Bank
100
90 days
0 days
1000
54.57%
3.43%
10.06
10.60
Barclaycard Initial
100
90 days
0 days
2000
29.90%
2.21%
10.12
2.5% of advance
9.41
^ Interest rates and fees as at 28 April 2010. Interest rates may differ from purchase rates. Interest rates are typical, and may differ depending
on individual circumstances - can be up to 59.9% for the Vanquis Visa Card. Minimum repayments can be affected by credit balance, maximum
credit limit, and individual circumstances.
Given the large difference in price, we therefore consider it unlikely that consumers would rationally choose to use
a payday loan in preference to credit cards for small sum, one-off borrowing, where they are confident that they will
be able to repay in full within a 90 day period.
However, the relative cost of credit cards and payday loans can be reversed where large credit card balances in
excess of 1000 have already accrued and where there is no prospect of the borrower paying these off within a
relatively short period. In these cases, the debtor using cards for purchases has an ongoing liability in interest
payments of between 20.09 and 26.90 per month and additional use of the credit card may no longer be an
attractive option. In these cases, we find that payday loans could present a competitively priced product. Indeed,
where a credit card borrower goes into arrears, or has been using their card to run up significant balances by taking
out cash advances, then it is also possible that payday loans could be a cheaper form of borrowing.
This analysis would suggest that payday borrowers are likely to consider payday loans an attractive alternative where
they have significant outstanding credit card debt. However, this raises concern that further borrowing is also likely
to be unsustainable. Unfortunately, there is little information available concerning the credit card use of payday
customers in the UK on which we can currently draw and this presents an area where further research is required.
Some evidence is available from the US where a recent study (Agarwal et al, 2009), which matched payday borrowers
with their credit card records, finds that the amount of liquidity remaining on US borrowers credit cards had
15
substantially reduced in the five months immediately prior to the use of payday loans, indicating (p.5) that borrowers
were starting to experience financial difficulties with credit card repayments. Importantly these problems do not
appear to be caused by a single income or expenditure shock but are more persistent. The study finds that taking
out a payday loan does not appear to help address this problem but predicts nearly a doubling in the probability of
serious credit card delinquency over the twelve months following the use of a payday loan.
Regardless of the presence of alternative credit options such as sub-prime credit cards, payday lenders have defended
their charges on the basis of the high costs associated with operating in the industry and argue that their customers
understand the cost of taking out a payday loan and are making an intelligent and informed choice. Payday lenders
argue that their products are provided more quickly, anonymously, and conveniently, all of which are valued by
their customers. Further, the presence of available credit on a credit card may not help the customer if they need
to make a payment for which they need cleared funds in their bank current account.
Lenders also argue that limiting their ability to charge high prices would make it unviable to continue operating in
the market. For example, Kitching & Starky (2006, p.9) cite an Ernst & Young (2004, p.39) report commissioned by
the Canadian Payday Loan Association which reports that the cost of providing a payday loan is in the range of
CA$15.35 to CA$21.22 per CA$100 loan, depending on the size of the business. The chief contributors to this
overall cost are reported as operating costs (75 percent of the overall cost) and bad debts (20 percent of the overall
cost). The cost of capital has a very small impact on the overall cost. The Ernst & Young report further argues that
the operational costs are high due to the small capital base and the short maturity period within which the lender
must recover all its fixed costs, including the costs associated with providing and writing the loan.
Further support for the argument that prices reflect high operating costs can be found in Flannery and Samolyks
2005 research for the US Federal Deposit Insurance Corporation. This examined data from two large store based
payday lenders to determine store operating costs and profitability levels and found that fixed operating costs and
loan loss rates accounted for a large part of the price of the loans.
In this sense, the prices of loans could be considered to be fair in that they reflect the genuine costs to originate
and recover loans from borrowers with a high risk of default.
Information regarding this issue is limited in the UK, where the only study that has been conducted forms part of
the recent Office of Fair Tradings review of high-cost credit. This study concluded that firms operating in the UK
market were able to generate a return on capital employed (ROCE) in excess of the weighted average cost of capital
(WACC) which may indicate that excess profits are being made. However, the Office of Fair Trading has not
considered this finding to be sufficient to have warranted further regulatory action, for example by referring the
industry to the Competition Commission for a full inquiry.
The Office of Fair Trading review also rejected the potential use of price capping measures for this and other high
cost credit markets. However, the Coalition Government has subsequently indicated that it is committed to
introducing a power for regulators to define and ban excessive prices in the credit and store card sectors of the
market, and the End Legal Loan Sharking Campaign being led by Compass has attracted considerable support from
MPs for the scope of this power to be extended to all areas of the unsecured market.
16
The rate cap debate
The debate concerning rate caps in the UK is long standing (see for example, Gibbons, 2003; Policis 2004; McCartney &
Gibbons 2008) and further research concerning the use and impacts of rate caps in other European countries is also due to
be published in the new year by the European Commission (Institut fur finanzdienstleistungen, forthcoming).
The European research indicates that generalisations concerning the impact of caps unhelpful, with the precise level of the
cap, degree of competition in the market, form of cap, and policy intent for example to eliminate excessive risk taking
all important.
A power for regulators to cap prices will therefore need to be accompanied by a clear set of criteria to which regulators
must have regard when using it. Reviewing prior debates on the issue in the UK, and the findings of the Competition
Commission inquiry into home credit (Competition Commission 2006), we suggest that these criteria would need to include:
Whether other measures, for example remedies designed to increase price competition, could address the problem
within twelve months. Regulators should be required to review progress and use their power to cap prices in the
event that no improvement in price has been achieved through the use of other remedies within a year
The level of any price cap, with regulators required to balance:
The desirability of maintaining access to affordable and responsible credit and the likely impact of the cap on its
supply
Levels of consumer detriment caused by a lack of price competition and the amount of the reduction in price that
could be achieved by the imposition of a cap for the majority of borrowers in the market
The estimated enforcement costs of the proposed cap
The desirability of eliminating clearly excessive risk taking by lenders in the market.
The form of the cap. Regulators should be tasked with constructing caps in such a way as to prevent lender avoidance
and pricing distortions
It should be noted that the Office of Fair Trading does not report on whether or not those lenders charging the
highest prices (30 per 100 lent and above) are targeting people for whom there is less competition, which may
be the case, or whether these extremely high charges are justified on the basis of higher default risks, in which case
the high cost of loans may indicate irresponsible lending practices (i.e. loans being given to people who cannot really
afford to take out any further borrowing).
In any event, for consumers the issue of whether or not the payday loan product represents good value in comparison
to possible alternative sources of credit is more pertinent to them than the level of profitability being made by
lenders. In this respect, payday lenders argue that obtaining a payday loan is cheaper than being forced into
unauthorised overdraft borrowing.
We find evidence in support of this argument, and the table below sets out a comparison of a payday loan of 100
charging a fee of 25 with unauthorised overdraft charges currently levied by five high street mainstream credit
lenders.
As can be seen from the table, the total monthly charge incurred from an unauthorised overdraft is higher than that
incurred from the payday loan in four of the five cases; and in the case of Lloyds TSB it is more than six times higher.
However, there are limitations to this analysis. In particular, as we go to explain, the comparison becomes less clear
cut as the overdrawn amount increases and on some occasions the cost of a payday loan may actually be more
expensive than an unauthorised overdraft.
17
Table 4: Cost of a payday loan compared to unauthorised overdrafts9

Amount borrowed/overdrawn ()
Loan period/overdraw period
Charges ()
Fees
Additional interest
Total charges ()
Payday loan^
100
100
1 month 1 month
Lloyds TSB
100
1 month
Santander
100
1 month
RBS
Barclays
100
100
1 month 1 month
25
25
60
1.01
61.01
35
1.48
36.48
88
20
1.02 1.45
89.02 21.45
165
0.83
165.83
Nationwide
The cost of an unauthorised overdraft falls as the amount overdrawn increases
The cost of a payday loan is fully attributable to a variable component (fee charged as a % of loan amount). In
contrast, the variable component of an unauthorised overdraft (interest charged) generally accounts for only a small
proportion of the total cost, whereas the fixed component (the fee charged irrespective of the amount of the
overdraft) generally accounts for a significantly larger proportion.
In addition, it is also important to note that the variable component of a payday loan (25 percent in our example)
is much larger than that of an unauthorised overdraft (average of 1.19 percent in the example above). Therefore,
given the characteristics of these two forms of credit, the cost of an unauthorised overdraft falls relative to a payday
loan as the size of the overdraft increases.
This relationship is demonstrated in the figure on the following page, where unauthorised overdrafts of increasing
amounts from various major lenders, are compared with payday loans of the same amounts. The comparisons are
based on a fixed loan term of one month.
18
This is the typical loan size cited by the Consumer Finance Association on their website.
figure one: comparison of payday loan and unauthorised

overdraft costs at different borrowing amounts
Interest on principle amount %
Interest on principle amount %

350
350
300
300
Payday loan
Lloyds TSB
250
250
Santander
200
200
RBS
150
150
Nationwide
Barclays
100
100
50
50
0
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
50
Loan/overdrawn amount (based on 1 month loan term)
19
Four key points arise from this analysis.
Firstly, at the typical initial payday loan level of 300 only two lenders (Lloyds TSB and Barclays) charge more for
an unauthorised overdraft than would be incurred for a payday loan
Secondly, the price of the payday loan is clearly important. The above example uses 25 per 100 as the payday
loan price. As stated earlier in this report, this is at the higher end of payday loan pricing, and charges can be as
little as 12 per 100. If this figure were used then a typical payday loan would be cheaper than an unauthorised
overdraft in the majority of cases at loan sizes of less than 400.
Thirdly, it can clearly be very difficult for consumers to make an informed decision about whether a payday loan
is more affordable than an unauthorised overdraft. This is exacerbated by the fact that the comparison may be
needed to be conducted against a part authorised/ part unauthorised overdraft.
Finally, it should be noted that the position is fluid. Lloyds TSB has recently announced a number of changes to
its overdraft charges which will take effect from December 2010. These include the introduction of a flat 5 per
month charge for the use of either a planned or unplanned overdraft which will significantly reduce the costs of
borrowing from them in comparison with payday lenders from that date.
It is therefore very difficult for many consumers to accurately determine whether or not a payday loan is genuinely
a cheaper option than using an unauthorised bank overdraft, and the marketing of some payday lenders appears
misleading in this respect. For example, the Moneyshop website contains an interactive comparator of payday loan
costs and bank fees which groups together all banks in the statement going 258 over limit costs way more with
the Banks. But the choice of the 258 figure as the basis for comparison is selective, as are the banks in this case
Lloyds, Barclays, HSBC, Natwest, and Halifax to which the Moneyshop is comparing its charges.
Bank charges
The difficulties for consumers are further compounded by the fact that it is at the banks discretion whether an unauthorised
overdraft is provided and so there may be situations where a consumer may be denied the overdraft and may instead be
charged a returned transaction fee for attempting to make a direct debit without sufficient funds in their account.
The amounts charged in these circumstances varies between financial institutions, but for the five considered in our
previous example these range from 5 (Santander) to 30 (Nationwide) and sometimes depend on the size of the
returned transaction. The fees are summarised in the below table.
Table 3: Summary of fees for selected banks
Returned/bounced
direct debit
Lloyds TSB (Returned item fee)
Santander (Unpaid item fee)
20
RBS (Unpaid item fee)
Fee (per
transaction)
20
5
15
25
30
5
Barclays (Unpaid item fee)

Nationwide (Unpaid item fee)
35
30
Fee
description
Lloyds TSB will charge up to a maximum of three fees per day.
Payable for unpaid items from the value of 0 to 9.99.
Payable for unpaid items worth 30 or more.
If there are not enough funds in a customer's account to pay the fee/s,
an unarranged overdraft is created for which only a monthly maintence
fee (of 15) is payable. RBS will not charge a paid referral fee or
interest on an unarrranged overdraft created from an RBS fee charge.
Again this position is subject to change. In March 2010 the Office of Fair Trading reported that it was making real
progress with banks to reduce these charges and increase transparency for consumers. This includes an
announcement that unpaid item charges have fallen from an average of around 34 in 2007 to around 17 in 2010
and per transaction paid item charges, levied when an unarranged overdraft is granted, have fallen from an average
of around 30 in 2007 to around 22 in 2010.
In the US, it has been noted (DeYoung & Phillips, 2009, p. 29) that increasing access to cheaper forms of mainstream
borrowing, and reducing bank overdraft charges, may be the best means of increasing competitive pressure on
payday loan prices, and we report further on the efforts being undertaken by the Federal Deposit Insurance
Corporation in this respect in chapter four.
The Office of Fair Trading also announced that it expects significant developments over the next two years,
including:
Greater ability for customers to 'opt out' of being granted unarranged overdraft facilities and the charges
associated with them
More tools available for customers to control their balances and avoid going overdrawn, and
Better treatment of customers who do go overdrawn and get into financial difficulty.
These developments could have a dramatic impact on the payday lending market, and it would also be helpful if
banks made the basis of their decisions as to when they will grant an unauthorised overdraft more transparent as
part of this work.
It may also be helpful for the Office of Fair Trading to look at the impact of using unauthorised overdrafts on
credit scores as part of this ongoing programme. During the course of writing this report, lenders indicated that
obtaining, and promptly repaying, a payday loan could be beneficial to a borrowers overall credit score whereas
entering into an unauthorised overdraft could have the opposite effect. This adds further complexity to the
decision as to which form of borrowing is best for individual consumers who are apparently required to weigh up:
The likelihood of an unauthorised overdraft being granted
The number of likely returned transaction fees if an unauthorised overdraft is not granted
Any additional costs (including in terms of time) of dealing with the creditors for whom payments have been
refused
Future implications for their relationship with the bank and/or other creditors and how the different options
will impact on their creditworthiness.
Comparing the price of unauthorised overdrafts with payday loans is also hindered by the fact that whilst payday
lenders are required to clearly state the APR for their loans, banks and building societies are exempt from this
requirement in respect of overdraft borrowing. This is an issue of key concern to payday lenders (BCCA 2010,
p. 4):
As our members are aware, payday loans are the only real alternative to bank overdrafts. However, the two
products do not operate on the same level playing field This is demonstrated by the fact that payday loans
must quote an APR making them appear more costly than they really are. Overdrafts, however, do not have
to quote an APR, despite them often being much costlier than payday loans in the short term.
Whilst we have some sympathy with this argument it is clear that no single measure of price would be able to
capture the complexity of the current fees structure associated with overdrafts in order to provide for a simple
comparison with payday loans. In addition, whilst recognising the difficulties of price comparison between payday
loans and bank overdraft and other charges, we consider that payday lenders are primarily selling their product
21
on the grounds that their loans offer greater certainty for consumers than relying on the banks to provide emergency
unauthorised credit (see also Office of Fair Trading 2010, Annex E, para 3.4 on this point).
This raises the question as to why borrowers do not want their banks to know of their additional borrowing and
why they do not obtain authorised overdraft limits suitable to meet their needs rather than use payday lenders.
Authorised overdrafts generally only incur a percentage daily fee which is usually set at the same rate as the variable
component of an unauthorised overdraft, and which would therefore be a much cheaper means of borrowing than
any payday loan products on the market.
Again, there remains an absence of information concerning the reasons why borrowers do not take this option, or
indeed as to whether or not they have attempted to extend any existing overdraft limit and been rejected by their
bank, prior to using payday lenders. Further research is needed on this question. However, in the interim we can
only surmise that many payday customers are aware that they have already exhausted available credit lines from their
banks and that an application for additional credit would not be viewed favourably. As we report below, this indicates
that there is a danger that payday loans are being provided to people who are already in financial difficulty.
DO PAYDAY LOANS TRAP CONSUMERS IN A CYCLE

OF REPEAT BORROWING?
Critics of payday loans argue that borrowing from payday lenders can be dangerous as borrowers may become too
highly indebted and can become trapped in a cycle of continuous borrowing. They argue that this is facilitated by
payday lenders, many of whom allow loan repayments to be deferred or rolled over to the next month provided
that the borrower makes a payment equivalent to the original interest fee or charge (see box, below).
Rollover Lending
Payday loan repayments fall due within very short time periods often only one month. If, on the due date, the borrower cannot afford for the debt to be recovered from their bank account then it is possible for them to roll over the
loan for a further period by paying just the fees and charges that have accrued. The recovery of the original amount of
the loan, plus a further set of fees and charges, is then deferred for a further month.
Industry practice concerning the use of roll over loans varies considerably, with some lenders restricting the number of
times they will allow this to as few as two, whilst others are content to offer a roll over as many as six times, and one
lender has been identified which makes roll over lending the default option.
This can be an extremely costly way to borrow money, with fees and charges rapidly escalating to 100% or more of the
original loan amount, as set out in the table below.
Date of loan
100 borrowed
Total cumulative repayments
1 month from
date of loan
25 paid in fees
and charges, but
100 sum rolled
over
25
2 months from
date of loan
25 paid in fees
and charges, but
100 sum rolled
over
50
3 months from 4 months from

date of loan
date of loan
25 paid in fees
and charges, but
100 sum rolled
over
75
25 paid in fees
and charges, but
100 sum rolled
over
200
There is some evidence to justify these concerns in the UK. Firstly, the amount of the initial loan, relative to income,
can be high. The typical payday lender has a monthly income of 1,000 and the average initial loan size of between
250 and 300 represents over one quarter of this. For repeat borrowers, payday lenders also indicate that they
22
are willing to lend significantly higher amounts of up to 1000, although the level of income required to obtain a
loan of this size is not known.
Further research in this area is urgently required, and undertaking a cohort analysis of payday loan customer
borrowing, relative to income and over time would be instructive. The Office of Fair Trading could also require this
information of payday lenders in order to demonstrate that they are lending sustainable amounts in accordance with
their guidance on irresponsible lending.
Secondly, there are reports from debt advice agencies that some payday borrowers are in financial difficulty prior
to taking out loans and that these only serve to exacerbate their problems. For example, Citizens Advice, in their
submission to the Office of Tradings High Cost Credit Review, highlighted the following cases:
A CAB in the West Midlands saw a 22 year old man who was single and living alone in local authority flat. He
was working but in receipt of a low wage. When he got into financial difficulties he turned to the internet and
a payday lender. They loaned him money until his next pay day when the money was taken from his bank
account. He was then short of money for the following month and so took out another loan and his situation
just got worse.
A Merseyside CAB saw a 24 year old man who had taken out a payday loan for 375 at cost of 75. He could
not pay back full amount before the next month. When the CAB contacted the lender it became apparent that
the terms of the advance were such that if the capital amount was not repaid each month the man was
considered to have taken a fresh advance each month at cost of 75. It appeared that the loan had been
revolved three times in this way.
A CAB in Yorkshire saw a 35 year old man on a low income who was desperate for money to pay bills. He took
out a payday loan by signing seven 100 cheques and one 50 cheque, receiving 85 cash for each 100
cheque. He had to make a payment of 14.99 each month to stop his cheques being cashed.
However, these cases remain rare. The Citizens Advice submission notes that payday lending accounts for a very
small proportion of their overall debt work, and their survey of 350 debt clients in 2007 revealed just four instances
of payday loans out of a total of 1,940 credit agreements.
Does Payday lending contribute to insolvency?
De Young and Phillips (2009) highlight the findings from a small number of US recent studies which have examined the relationship between payday lending, credit defaults and bankruptcies and Berry & Duncan (2007) have also examined this issue
in Canada. These provide evidence on both sides of the debate that either:
Having access to payday loans allows people to meet financial emergencies more easily and so reduces the likelihood
of defaults
or conversely that:
Payday borrowers are more likely to become highly indebted and are pushed into insolvency.
This debate is not yet reflected in UK studies into payday lending and there may be a need for further research in this area.
Payday loans themselves are unlikely to turn up in bankruptcy petitions due to the lenders ability to recover their debts directly from the borrowers bank account if payments are not maintained or loans rolled over. The recovery of a payday
loan in this way may tip a borrower into insolvency but would not itself be outstanding at the time of a petition being presented. On the other hand, the Office of Fair Tradings High Cost Credit Review found that some lenders did exercise forbearance and were lenient to customers in financial difficulties.
23
Concerns about repeat and roll over borrowing have been longer standing in the U.S, where critics of the industry
have suggested that payday lenders have no incentive to prevent consumers from rolling over their loan as this is
how lenders make the majority of their profit. Indeed, King et al (2006), in a report by the Center for Responsible
Lending, found that ninety percent of the revenue collected by payday lenders was obtained from borrowers who
have five or more loans per year, and there have been a number of studies which indicate that repeat borrowing is
a problem in the U.S (see for example, Brown & Cushman, 2006).
Reviewing the evidence, De Young and Phillips note (2009, p.7) that the profitability of payday lenders depends on
repeat borrowing. This is because repeat business accounts for a large part of total volumes, and allows lenders
to make savings on marketing and other operational costs associated with obtaining new customers.
It should be noted that payday lenders do offer preferential rates to repeat borrowers, and that the difference in
price is a significant incentive to pay back on time. For example, online payday lender Quickquid offer excellent
borrowers a rate of 20 per 100 borrowed compared to a rate of 29.50 per 100 for borrowers with an average
credit rating. This would indicate that there is an attempt by some lenders to encourage prompt repayment of loans
rather than encourage roll over borrowing. Indeed, the Payday UK website indicates that even where repayments
are deferred for another month it encourages people to pay off at least some amount of the principal in order to
reduce the overall debt burden:
We do understand that occasionally people will need to borrow money for a second month. We call this a
deferral. You will have to repay the charges and we suggest you pay as much as possible to reduce further
charges.
However, this is not a universal practice and some lenders appear to take the opposite approach of encouraging
rollovers. The payday lending website Uncle Buck charges new customers 30 per 100 lent, and makes a 30
charge each time the loan repayment is deferred. It appears to place no limits on the amount of times a loan
repayment can be deferred in this way and advises that:
We will automatically keep extending your loan until we receive instructions to take full repayment from you.
In this case, within three months the borrower will have paid 90 in charges per 100 borrowed and will still not
have repaid any of the principal. We find it difficult to see how this practice conforms to the Office of Fair Trading
guidance on irresponsible lending and note that Uncle Buck is not a member of a payday lending association, and so
would not be covered by a code of practice.
The following chapter looks at how authorities in the US and Canada have sought to address these concerns about
price, levels of indebtedness, and repeat borrowing, for example by placing limitations on the total allowable charge
for credit, on loan amounts relative to income, and by restricting the number of roll over loans or repeat loans within
a given period. It also provides an illustration of the variable practice of payday lenders in the UK market.
24
Chapter Four: Policy responses

in the United States and Canada
This chapter summarises the regulatory and self regulatory approaches that have been adopted in the US and Canada
in relation to payday lending. We find that, with the exception of caps on the total charge for credit, a common
approach to payday regulation is emerging in which the amount of payday lending relative to income and restrictions
on multiple, repeat, and roll over lending form the key components. We also proceed to look at current practice
in the UK market where, in the absence of formal restrictions in these areas, there appears to be considerable
variation in lending practice.
REGULATION OF THE PAYDAY INDUSTRY IN THE UNITED STATES
In the US, regulation of the payday industry is a responsibility for individual state legislatures with the exception of
a federal law concerning the extension of payday loans to military personnel, although the newly created Consumer
Financial Protection Bureau10 is also expected to set new rules for the industry at the Federal level.
Payday lending is currently prohibited in fifteen states and the District of Columbia.11 This has occurred either
through an explicit prohibition, or implicitly by setting the maximum allowable APR so low that it is no longer viable
for payday lenders to operate in that jurisdiction.
In contrast, thirty five states in the US provide favourable conditions for payday lenders to operate. This occurs
either by not placing any cap on prices on the industry or by placing one at a level which is sufficiently high to allow
lenders to make a profit. Full details of existing regulatory responses in these states can be found in Appendix B to
this report.
Most of these states have also implemented regulation regarding:
The maximum loan amount. Caps on loan size range from $300 to $2,500, with the majority of caps being set
at $500. In some states caps have been set at around one-quarter of the borrowers monthly income
The number of roll over loans allowed (this generally ranges from 0 to 4, although Missouri allows 6 roll over
loans provided that the principal is reduced by 5 percent or more at the time of each renewal)
The time period for which the loan can be taken out for (ranging from a minimum of 5 days to a maximum of 60
days)
The collection fees charged for overdue loans
The cooling off period in which consumers can change their mind
The provision of a repayment plan if the borrower faces problems repaying their loan, and
The number of loans which can be taken out at one time (this ranges from 1 to 3).
Some states have also established central databases in order to enforce their limitations on the number of payday
loans that can be obtained at any one time, and to avoid borrowers taking out loans from multiple providers. Payday
lenders are required to enter the details of all loans they provide within the state into these databases, and this
information is provided to all other payday lenders in the state. However, critics have raised concerns about these
1
2
See http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=35515
See http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=41619&SESSION=905
25
databases as they argue that these can be easily manipulated as additional loans can be issued in the names of other
family members (Consumer Federation of America, 2007).
In addition to action at the state level, the US federal Government enacted legislation in 2007 to provide additional
protection for members of the United States armed forces and their family. Through the Military Lending Act 2007,
lenders are barred from charging more than 36 percent for payday, auto title, and refund anticipation loans made
to military families. However, this legislation only covers payday loans that are made for less than 91 days (Military
Lending Act, 2007, p. 2). The legislation was introduced after concerns were raised that predatory practices weakened
the military, and that debt issues impacted on the security clearances of military personnel.
Further action at the federal level is also in process including a federal Payday Lending Limitation Act of 2010, which
was introduced into Congress on 21 April 2010. If enacted the Act will:
Prohibit creditors from issuing new payday loans to borrowers with six loans over the previous 12 months or
90 days of indebtedness
Provide borrowers with an option to repay over a longer time period, and
Authorise the Federal Reserve to licence and regulate payday lenders.
Self regulation
The payday industry in the US has also established a voluntary industry organisation, the Community Financial
Services Association, whose role includes the promotion of best practice within the payday industry. Around half
of the payday lenders in the US are members of this organisation (Community Financial Services Association, undated.
p. 1). This organisation mandates that:
All fees must be clearly outlined by its members
A loan can only be rolled over a maximum of four times, unless state legislation mandates otherwise
Customers should be given until the close of the following business day to change their mind; and
Customers who are unable to repay a payday loan in the agreed timeframe will be given the option of repaying
the advance over a longer period of time. There will be no charge for this service.
Expanding access to alternative mainstream provision
In addition to these regulatory and industry-led initiatives, the US is also at the forefront of developing mainstream
alternatives to payday lending. In December 2007, the Federal Deposit Insurance Corporation established a small
dollar loan pilot with 28 participating banks specifically in order to provide affordable alternatives to payday lending
and fee based overdraft programs.
The pilot was large, comprising some 34,400 small-dollar loans with a principal balance of $40.2 million. It completed
in December 2009 and the FDIC reports that it demonstrates how banks can offer a viable commercial product to
low income households with default risks similar to other types of unsecured credit. It further indicates that small
sum credit products can be used to build and retain long-term banking relationships with people on low incomes
and that there may be advantages in offering small sum loans alongside simple savings products and financial education.
26
REGULATION OF THE PAYDAY INDUSTRY IN CANADA
Payday lending spread to Canada soon after its inception in the United States and has grown to around 1,400 outlets
across the country. Following concerns about the high interest rates being charged by the industry, its federal
government took steps to regulate the industry in 2006. This regulation occurred through An Act to Amend the
Criminal Code (Criminal Interest Rates) 2006, where the government stipulated that it would be a criminal offence
for a lender to charge an interest rate of more than 60 percent per annum. However, the federal government
allowed provinces to set a higher maximum cost of borrowing, provided the province sought designation from the
federal government to do so. In addition, provinces wishing to allow a higher interest rate had to ensure that they
licenced all payday lenders operating in their jurisdiction and the Act also limits the size of payday loans to $1,500
and requires the loan period to be less than 62 days (Kitching et al, 2007, p. 1).
To date, eight jurisdictions have requested designation to provide specific payday lending legislation. These provinces
have set a maximum cap on the cost of borrowing of between $17 and $31 per $100 borrowed (Government of
Ontario, 2009). In addition, some provinces have also introduced a wide range of responsible lending protections,
including the following:
A two day cooling off period, in which a borrower can cancel his loan without incurring any penalties
A prohibition on the rolling over of loans
Prohibiting discounting whereby some fees are included in the loaned amount, resulting in consumers borrowing
less than they intended
Establishing a payday lending education fund, paid for by licensees
A prohibition on more than one payday loan being issued to a customer at a time by the same lender, and
The setting of a flat rate for defaults (ranging from $20 to $40).
Self regulation in Canada
In addition to these regulatory measures, the payday industry has established a voluntary industry organisation, the
Canadian Payday Loan Association, with a code of conduct requiring members to observe the following rules:
A prohibition on the rolling over of loans
A prohibition on issuing multiple loans at the same time
The use of plain English in disclosure documents, which must include mention of the high cost nature of the
payday loan
A prohibition on payday lenders taking title to chattels or assets of a borrower as security for repayment of a
payday loan; and
A maximum limit of $0.90 per week for a $100 loan for the first thirteen weeks of a loan being in default, this
amount will fall to $0.50 per week thereafter.
Membership of the association comprises 530 of the 1,400 (37%) of all payday lenders operating in Canada.
27
CURRENT UK LENDING PRACTICE
In contrast to the regulatory requirements placed on lenders in many US states and Canadian provinces, UK lenders
are not currently subject to clear restrictions in terms of loan amount, rollover lending, and default fees.
As a consequence there are significant variations in practice. To illustrate this, we undertook a desktop survey of
the websites of MEM Finance Ltd and its trading operation Payday UK; Quickquid; Payday Express; Mr Lender;
Lending Stream, and Wonga.com in October 2010. The exercise reveals that:
Only one of the sites we looked at, MEM Finance Ltd, contained details of a policy limiting the amount of loan
relative to income in this case to 32% of available income. However, the term available income is not defined,
and this policy is not published on the website of its customer facing trading operation, Payday UK.
Few lenders set out a clear policy concerning roll over lending. Whilst a number appear not to promote it,
these do not set any limit. For example:
Wonga.com states that they will not keep rolling your existing balance endlessly,
Mr Lender promises to review your situation on an individual basis
Payday UK that occasionally people will need to borrow money for a second month
Payday Express says it does not recommend it
In contrast, those that do provide specific limits on the number of rollovers set these at high levels and some
appear to offer rollovers as a default option.
Quickquid allows five rollovers for loans that were originally scheduled to be cleared within one month, and
four rollovers for those originally scheduled to be cleared within two months,
The Lending Stream appears to set up agreements based rolling over loans for between four and six pay
periods, although the website then suggests borrowers should pay off the loans more quickly than this in
order to reduce the total cost.
There is considerable variation in practice concerning default charges:
28
Mr Lender charges a 10 administrative fee for late payment and charges interest until full repayment has
been made.
Quickquid, and Lending Stream each charge a 12 late payment fee. It is not clear how long interest will
continue with Quickquid but it continues until full payment is received in the case of Lending Stream, which
also indicates it will charge a persistent late fee of 10 and a further 40 when passing the debt onto its
collections section.
Wonga.com charges 7.50 if payment is not collected at the start of the due date, and a further 17.50 if
the amount is unpaid by 5pm on the same day. It then provides for interest to be charged for a sixty day
period.
The terms and conditions for Payday UK loans allow charges of 10 each for the second, third, and fourth
request letters and reasonable charges for collection.
Chapter Five: Conclusions

and Recommendations
The previous chapter has highlighted the considerable efforts being taken in the US and Canada to regulate payday
lending. Whilst we acknowledge that the UK payday customer base may be broader and reach people higher up the
income scale than in either the US or Canada, the provision of payday loan products to some lower income working
people is common to all three countries. There is therefore an opportunity to learn from the regulatory practices
of these other countries when informing the UKs approach.
We consider that there are two main concerns in the UKs payday lending market that, need to be addressed and
where the US and Canadian approaches could be helpful. Specifically, these are:
Payday loans are an expensive form of borrowing.
more needs to be done to bring competitive pressure to bear on the market to reduce prices, and
to increase the transparency of the costs of payday loans relative to alternative forms of borrowing.
There is a danger that payday lending can lead to a high level of indebtedness and patterns of repeat and
unsustainable borrowing for some consumers.
The remainder of this chapter takes these two findings in turn, providing details of our conclusions and
recommendations for further action.
PAYDAY LOANS ARE EXPENSIVE
Whilst we agree that APR measurements are not useful, there can be no doubt that payday loans are an expensive
form of borrowing. In some situations, payday loans are more expensive than unauthorised overdrafts and bank fees,
although it is difficult for consumers to accurately assess the relative costs of each option.
The difficulties for consumers are compounded by the lack of transparency concerning whether or not a bank will,
in fact, make an unauthorised overdraft available or whether transactions will be declined and charges incurred.
However, some of the advertising from payday lenders which compares their prices to bank charges may be
misleading and inaccurate, and cannot possibly take account of the precise nature of the borrowers circumstances.
Action therefore needs to be taken to address this by the Advertising Standards Agency and Office of Fair Trading.
Responsible payday lenders should ensure that their advertising of the costs of payday loans relative to bank
overdrafts and charges is balanced and warns consumers that whether or not it is cheaper to take out a payday loan
will depend on who they bank with and their individual circumstances.
Whilst this action will make the position clearer for consumers, it will not, of course, result in lower prices. In the
US and Canada many states have taken action to cap prices directly and in Canada caps at $21 or $23 per $100 lent
have even been welcomed by the some lenders (Dollar Financial, 2010). Caps of this nature are likely to eliminate
very high risk lending as they limit the ability of lenders to cover a high proportion of defaults.
Although the Office of Tradings High Cost Credit Review rejected the use of caps, the Coaliion Governments
commitment to provide regulators with the power to define and ban excessive rates in the credit and store card
markets re-opens this debate, and we consider that the scope of the power should be extended to all forms of
unsecured credit in line with the position being taken by the End Legal Loan Sharking Campaign. We do, however,
also acknowledge that a clear set of criteria needs to be provided to regulators in order to guide their use of such
a power and provide our views on this on page 17.
29
In the alternative, it may be possible for the Office of Fair Trading in the UK to use its irresponsible lending guidance
as the means to address very high risk lending, although is likely to be a more complex process than the use of price
caps, and could prove more expensive to administer both the regulator and for the industry given the uncertainties
involved.
As yet, it is not clear how the Office of Fair Trading guidance is to be enforced, and there appears to have been no
action taken against lenders which currently provide for a default option of unlimited roll over borrowing. We
therefore recommend that the Office of Fair Trading launch an immediate review of the practices of these payday
lenders against the Irresponsible Lending Guidance and that it take enforcement action as appropriate.
Greater competitive pressure could also be brought to bear by reducing bank charges and fees. The lessons from
the US small dollar pilot should therefore be fully considered and regulators should examine the case for a similar
pilot with British banks. This pilot could test whether direct mainstream provision of small sum loans, combined with
financial education and access to simple savings products, offers:
A valid commercial proposition for banks
Savings on the traditional model of financing credit for low income borrowers through social lending
intermediaries such as Credit Unions and Community Development Finance Institutions, and
Is more likely to be taken up by people currently using payday products than these other forms of affordable credit
provision.
We also consider further research is required to determine why payday lending borrowers do not use credit card
borrowing, or seek authorised overdrafts, in the place of payday loans as these appear to present much cheaper
borrowing options. Research in this area also needs to examine whether this is because the majority of payday
borrowers have already exhausted their overdraft limits or have accrued significant credit card balances and should
look into the relationship between payday lending use, credit defaults, and insolvencies in more detail.
Finally, responsible payday lenders could do more themselves to demonstrate their commitment to actively compete
on price terms. For example, lenders could offer a price challenge for borrowers with good repayment histories,
promising to beat the cost of a loan from another payday lender if the borrower can demonstrate that they have
repaid previous loans on time. To facilitate this, members of the trade associations could agree to share this
information with each other where this has been requested by the borrower.
THERE IS A DANGER THAT PAYDAY LENDING COULD LEAD TO A

HIGH LEVEL OF INDEBTEDNESS
In our view, there are legitimate concerns that payday lending can contribute to high levels of indebtedness and cause
people to become trapped in a cycle of repeat borrowing. The Office of Fair Trading High Cost Credit Review has
indicated that industry codes of practice should be developed which include a rule of thumb on loan to income ratios
for lenders to use when determining the level of loans. This is clearly a much softer approach than those being
pursued in many of the US states or Canadian provinces, and we would prefer a clear statement from the industry
that maximum loan values will not exceed one quarter of monthly income as is the case in some US states.
30
We would also welcome the development of an industry wide commitment to avoid multiple, repeat, and roll over
lending and to ensure that borrowers in financial difficulties are provided with assistance to reduce their level of
debt without incurring additional charges. We consider the best practice here to be that of the Canadian Payday
Loan Association which prohibits entirely the use of roll over lending and provides limits on the default fees that its
members can charge,. In the UK, there is some existing good practice in the UK to build upon, such as the limiting
of the number of roll over loans to two, and providing for no additional charges when a loan is in default.
In the US, the efforts to establish payday lending databases to ensure that multiple loans are not taken out in the
same month from different lenders are also important and we consider that this could be taken forwards in line with
the Office of Fair Tradings recommendation from the High Cost Credit Review to improve data sharing.
Finally, it would be useful for any codes of practice to go through the Office of Fair Tradings formal approval process,
and the draft codes should also be provided to stakeholders for consultation.
31
Appendix A: Comparison of a payday loan to various

unauthorised bank overdrafts
Tables: Comparison of a payday loan to various unauthorised bank overdraft
32
Scenario one
100
Charges ()
Fees
Additional
Total charges ()
Total interest on initial amount %
Payday
loan^
100
1 month
Lloyds TSB
100
1 month
Unauthorised bank overdrafts*

Santander
RBS
Barclays
100
100
100
1 month
1 month
1 month
Nationwide
100
1 month
25
25
25%
165
0.83
165.83
166%
60
1.01
61.01
61%
20
1.45
21.45
21%
Scenario two
450
Charges ()
Fees
Additional
Total charges ()
Total interest on initial amount %
Payday
loan^
450
1 month
Lloyds TSB
450
1 month
Unauthorised bank overdrafts

Santander
RBS
Barclays
450
450
450
1 month
1 month
1 month
Nationwide
450
1 month
112.5
112.5
25%
215
3.74
218.74
49%
60
4.55
64.55
14%
20
6.53
26.53
6%
Scenario two
450
Max. loan amount
one time
Alabama
Payday
Unauthorised bank overdrafts
loan^
Lloyds TSB
Santander
RBS
Barclays
State
Loan Term Max. finance rate and fees
Max. number of outstanding loans at
Max. number of roll overs Cooling off period
Collection fees Other
$500
10-31 days
17.50%
3% per month after default.

one
applied
No maximum number but the max $ amount of loans at one time is $500.
Next business day after 2 continuous loans repaid.
one $30 NSF fee can be
35
1.48
36.48
36%
35
6.66
41.66
9%
88
1.02
89.02
89%
88
4.59
92.59
21%
* Lloyds TSB Premier Current Account, Santander Reward Account, RBS Interest Paying Current Account, Barclays Bank
Account, Nationwide Cash Card Account. Fees and interest rates current as at 22 April 2010.
^ Payday loan companies PaydayBank UK Ltd, Early Payday Loan ltd, UK Payday and Shakespeare Finance Ltd.
All these payday loan companies advertise typical APRs of 1355% (as at 17 April 2010).
Fees vary across the payday industry, Moneysupermarket.com states that the fee range NOT CLEAR for a 100 loan.
$500
$500
$500
$300
Alabama
Alaska
Arizona
California
15% of cheque One
$5 + the lesser Not Specified

of $15 per
$100 or 15%
17.50%
No maximum
3% per month number but
after default. the max $
amount of
loans at one
time is $500
Max.
Max.
Finance rate number of
and fees
outstanding
loans at
one time
Maximum of 15% of cheque One
Minimum of
5 days
Minimum of
14 days
10-31 days
Loan
Term
None
Three
Two
One
Max.
number
of roll
overs
Not specified
Not specified
Not specified
Next business
day after 2
continuous
loans repaid
Cooling
off
period
$15 NSF fee
$25 NSF fee plus

actual costs
assessed by the
lender
$30 NSF fee

Court costs can be
claimed for up to
$700 over the
amount of the
payment (if
disclosed in loan
agreement)
one $30 NSF fee

can be applied
Court costs can
also be claimed up
to a maximum of
15% of face amount
Collection
fees
12
This appendix sets out current payday lending legislation passed at the state level within the US. The acronym NSF refers to charges levied
when payday loan repayments are returned unpaid from banks due to non sufficient funds.
Max.
loan
amount
State
Appendix B: US state level payday lending regulation12
There is a requirement for lenders

to set up an instalment repayment
plan if max number of rollovers
reached and debtor unable to pay
the balance. No fees can be charged
for this.

the balance

the balance
Other
33
Max.
loan
amount
$500
$500
$500
$600
$1,000
Lesser of
$1000 or
25% gross
monthly
income
Colarado
Delaware
Florida
Hawaii
Idaho
Illinois
34
State
13-45 days
Not
specified
$15.50 per
$100
Not specified
10% +
verification
fee
Maximum of 15% of
32 days
cheque
7-31 days
Maximum of Not specified

60 days
Two
Not specified
($1000
aggregate
loans
outstanding
to all
licensees)
One
One
None
Three
None
None
One
Max.
number
of roll
overs
No number
Four
specified but
no more than
$1000 to be
borrowed in
total at any one
time from all
payday lenders
One
Max.
Max.
and fees
outstanding
loans at
one time
Maximum of 20% for

amounts up
to $300 and
7.5% for
amounts
between
$301-$500
Loan
Term
7 days after
45 loan days
have elapsed
Not specified
Not specified
24 hours
Not specified
Not specified
Cooling
off
period

the balance
Other
One $25 NSF fee

Also limits the number to set up an instalment repayment
of times a cheque can plan if max number of rollovers
be presented to the reached and debtor unable to pay
bank to two
the balance
$20 NSF fee + 12%

interest per annum
annum on unpaid
amount (if disclosed)
$20 NSF fee
All charges imposed

on the lender by any
financial institution;
lender not entitled
to treble damages.
Not specified
One $25 NSF fee

plus reasonable
court costs
provided these
do not exceed
the loan amount
Collection
fees
Max.
loan
amount
Lesser of
$550 or
20% of
gross
monthly
income
$500
$500
$500
State
Indiana
Iowa
Kansas
Kentucky
14-60 days
7-30 days
Maximum
Minimum
of 14 days
Loan
Term
Not
specified
None
None
Max.
number
of roll
overs
$15 per $100 Two. No

None
more than an
aggregate of
$500 can be
borrowed from
all payday
lenders in any
one period
15%
Two
One per
lender and
two in
total
$15 for sums Two

up to $100;
$10 per $100
thereafter
15%for sums
up to $250
13% for sums
between
$251 and $400
10% for sums
between
$401-$550
Max.
Max.
and fees
outstanding
loans at
one time
None
Not
specified
Not specified
7 days
after six
loans have
been made
Cooling
off
period
One NSF fee
One NSF fee
One $15 NSF fee
One $20 NSF fee
Collection
fees
After three consecutive loans the

lender must offer an extended
payment plan of at least four equal
instalments at no additional cost
Other
35
Max.
loan
amount
$350
$600
$350
Lousiana
Michigan
Minnesota
36
State
Maximum
of 30 days
Maximum
of 31 days
60 days
Loan
Term
$5.50: $0-$50; Not

10%+$5:
specified
$51-$100; 7%
(min. $10) +
$5: $101-$250;
6% (min. $17.50)
+ $5: $251-$350
(After default:
2.75% per
month).
15% of first
One per
$100, 14% of lender
second $100,
13% of third $100,
12% of fourth $100,
11% of fifth $100,
11% of sixth $100
+ any database
verification fee
$5 document Not
fee and the
specified
greater of
16.75% of the
total or
$45
After default:
months 1-12
are calculated
at 36% per
year; months
13 and beyond
at 18% per year
Max.
Max.
and fees
outstanding
loans at
one time
None
None
Not
specified
Not
specified
Cooling
off
period
None
Not
(cannot
specified
renew or
rollover
but
lenders
may
accept
partial
payment
of 25% of
amount
advanced
plus fees
and enter
into a new
loan)
Max.
number
of roll
overs
$30 NSF fee
One $25 returned

check charge
One NSF fee of

actual bank charge
(if disclosed plus the
greater of $25 or 5%
of loan (if disclosed);
court costs; reasonable
attorneys fees
Collection
fees

the balance
Other
Max.
loan
amount
$400
$500
$300
$500
State
Mississippi
Missouri
Montana
Nebraska
Maximum
of 31 days
Maximum
of 31 days
14-31 days
Maximum
of 30 days
Loan
Term
$15 per
$100 or pro
rata for
any part
thereof on
amount of
cheque.
25%
Two
Two
Not specified Not

(total amount specified
of accumulated
interest and
fees should
not exceed
75% of the
initial loan
amount on any
single
authorised
loan.
Otherwise,
interest is
set pursuant
to small loan
law which
provides that
parties may
set rate by contract.)
18% of cheque. Not

specified
Max.
Max.
and fees
outstanding
loans at
one time
Not
specified
Cooling
off
period
None
None
Not
specified
Not
specified
Six
Not
(borrower specified
must reduce
principal
amount of )
loan by
5% or
more upon
each renewal
None
Max.
number
of roll
overs
$15 NSF fee
Other
1 $30 NSF fee;

attorney's fees if disclosed.
NSF fee; Collection

costs (including court
costs and reasonable
attorney's fees)
NSF fee; court

awarded fees (if
disclosed)
Collection
fees
37
Max.
loan
amount
25% of
expected
gross
monthly
income
$2,500
$500
$500
State
Nevada
New Mexico
North Dakota
Oklahoma
38
$15.50 per
$100; $.50
verification
fee per $100
Total
capped at
25% gross
monthly
income
Not specified Not

(after default: specified
interest rate
must be
equal to or
less than the
prime rate at
the largest
bank in the
State of Nevada
plus 10 %)
Max.
Max.
and fees
outstanding
loans at
one time
12-45 days
$15 per $100: Two

$0- $300; $10
per $100: $301
-$500.
Maximum of 20% +
Not
60 days
databasing fee specified
($600
aggregate
loans
outstanding
to all
lenders)
Usually 14
to 35 days,
but can be
shorter if
agreed
Maximum
of 60 days
Loan
Term
10 days
0 (a
Second
loan made business day
within13 after the 5th
days after loan repaid
a previous
one was
entered into
shall be
considered a
renewal)
One
3 days
(renewal
fee not to
exceed 20%
of amount
being
renewed)
None
Cooling
off
period
Not
Not
specified specified
(lenders
cannot
extend
payment
period
beyond
60 days
after
expiration
of initial loan
period).
Max.
number
of roll
overs
Other
$25 NSF fee

(if disclosed) unless
dishonored due to
theft or forgery
Prohibited (unless
account was closed
on date of original
transaction)
$15 NSF fee one

time per loan
There is a requirement for lenders to

set up an instalment repayment plan if
max number of rollovers reached and
debtor unable to pay the balance
Has a repayment plan which involves

equal instalments over 130 day period
$25 dishonored
cheque fee (max. 2
set up an instalment repayment plan if e
fees for insufficient
funds; max. one fee
for closed account)
attorney's fees;
service of process costs
Collection
fees
Max.
loan
amount
$500
$300
$500
$500
None
specified
State
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
15%
7-31 days
Maximum
of 31 days
Not
specified
$10 per
loan + 48%
annual
interest
The lesser of
15% of the
cheque or
$30
Not
specified
None
Not
specified
Not
specified
Not
Not
specified
Cooling
off
period
Four
Not
(licensee specified
can
renew,
rollover
or flip
loan if
debtor
pays
outstanding
fee each
time)
None
specified
One
Max.
number
of roll
overs
Not Specified None

($500 aggregate
loans outstanding )
to all licensees
Three
(maximum )
of two per
lender)
Not
specified
Not
specified
Three
totalling
no more
than $500
Max.
Max.
and fees
outstanding
loans at
one time
Maximum of 15%
31 days
Minimum of
13 days
Loan
Term
Not
specified
One $30 NSF fee;

court costs
Not
specified
Lesser of: NSF fee

of $10 or actual
charge
Not
specified
Collection
fees
Other
39
Max.
loan
amount
None
specified
$500
$700
Utah
Virginia
Washington
40
State
No
limit
None
Not
specified
1 day
after pay,
45 days
after 5th
loan, 90 days
after pay plan
Cooling
off
period
Cannot
None
extend
or renew
loan more
than 12
weeks
from
original
loan date
Max.
number
of roll
overs
A company
None
cannot hold
a check or
checks in an
aggregate face
amount of
more than
$700 plus
allowable fees
from any one
borrower at any
one time
36% annual
One
interest +
$5 verification
fee + 20% of
loan
No usury
limit
Max.
Max.
and fees
outstanding
loans at
one time
Maximum of 15%: first

45 days
$500; 10%:
remaining
portion of
the loan in
excess of
$500 up to
the $700
maximum.
Minimum
of 2 pay
periods
May not
exceed
12 weeks
Loan
Term
$25 NSF fee (one )

time per instrument);
collection costs
(excluding attorneys
fees, interest and
damages)
$25 NSF fee; court

costs; reasonable
attorney's fees
(not to exceed $250)
Not
specified
Collection
fees
A company and a borrower may

voluntarily enter a payment plan at any
time. A borrower, however, has a right
to convert a small loan to a statutory
payment plan after four successive loans
and prior to default on the last loan


Other
Max.
loan
amount
Total
payday
borrowing
from all
payday
lenders
limited to
$900
Not
specified
State
Wisconsin
Wyoming
One
month
Loan
Term
The greater .
of 20% or $30
Proposal
of no limit,
although
amount of
interest
that a licensee
can charge
after the
maturity date
cannot be
more than
2.75 percent
per month
Max.
Max.
and fees
outstanding
loans at
one time
None
Max.
number
of roll
overs
Cooling
off
period
$15 NSF fee if check
returned due to no
account open at bank,
insufficient funds or
insufficient credit.
Cheques can only
be presented for
payment twice
Collection
fees
Governor still to sign payday lending

Bill. Bill states that payday loan stores
cannot be located within 1,500 feet of
one another or 150 feet of residential
areas
Other
41
Bibliography
Agarwal, S., Skiba, P. M., & Tobacman, J. (2009, January). Payday loans and credit cards: new liquidity and credit
scoring puzzles? Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1327125
Bank of England. (2010, May). Lending to Individuals. Retrieved June 30, 2010, from
http://www.bankofengland.co.uk/statistics/li/2010/may/index.htm#tables
Berry, R. E., & Duncan, K. A. (2007). The importance of Payday Loans in Canadian Consumer Insolvency.
University of Manitoba.
British Cheque & Credit Association. (2010). Overdrafts - helping to keep Britain in the red! Spring Newsletter ,
pp. 4 - 5.
Brown, W. O., & Cushman, C. B. (2006). Payday loan attitudes and usage among enlisted military personnel.
Retrieved May 3, 2010, from http://www.creditresearch.org/editor/assets/files/060628MilitaryPDLSurvey.pdf
Citizens Advice. (2009). Citizens Advice note to the Office of Fair Trading high cost credit review. London.
Collinson, P. (2010, May 29). Interest rates: time to introduce a cap. Retrieved June 6, 2010, from The Guardian
Money Blog: http://www.guardian.co.uk/money/blog/2010/may/29/interest-rates-cap
Competition Commission (2006). Home Credit Inquiry: Final Report. Competition Commission. London
Consumer Federation of America. (2007, February 28). Payday Loan State Databases Don't Work. Retrieved May
3, 2010, from http://www.stoppaydaypredators.org/pdfs2/pdl_state.pdf
DeYoung, R., & Phillips, R. J. (2009). Payday Loan Pricing. Federal Reserve Bank of Kansas City.
Dollar Financial Corporation. (2009). Form 10-K: Annual Return.
Flannery, M., & Samolyk, K. (2005). Payday lending: do the costs justify the price? Washington DC: Federal
Deposit Insurance Corporation Center for Financial Research.
Gibbons, D (2003). Capping prices in the home credit market. Debt on our Doorstep. Manchester
Gibbons, D. (2010). Redesigning Consumer Financial Protection: how will we compare with the U.S?.
Responsible Credit, Vol 1, Issue 2. Centre for Responsible Credit. London
Institut fur Finanzdienstleistungen (forthcoming). Study on interest rate restrictions in the EU.
King, U., Parrish, L., & Tanik, O. (2006). Financial Quicksand. Washington DC: Center for Responsible Lending.
Kitching, A., & Starky, S. (2006). Payday loan companies in Canada: determining the public interest. Retrieved May
15, 2010, from http://epe.lac-bac.gc.ca/100/200/301/library_parliament/payday_loan-e/PRB0581-e.pdf
Kitching, A., Starky, S., & Bergevin, P. (2006, November). An Act to amend the Criminal Code (criminal interest
rate). Retrieved May 3, 2010, from http://www2.parl.gc.ca/Sites/LOP/LegislativeSummaries/bills_ls.asp?lang=
E&ls=c26&source=library_prb&Parl=39&Ses=1
McCartney, I. & Gibbons, D. (2008). Protecting low income borrowers in the credit crisis. Debt on our
Doorstep. Manchester
42
Office of Fair Trading. (2009). Review of high-cost credit: interim research report. London.
Office of Fair Trading. (2010). Review of high-cost credit: final report. London.Office of Fair Trading. (2010a).
Irresponsible lending - OFT guidance for creditors. London.
Policis (2004). The effects of interest rate controls in other countries. Department for Trade & Industry. London
Skiba, P. M., & Tobacman, J. (2009). Do Payday Loans cause bankruptcy? Retrieved May 10, 2010, from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1266215
Stegman, M. (2001). The public policy challenges of payday lending. Popular Government , 66 (3).
43

UK Payday Lending Report Reviews Debate and Policy Options

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UK Payday Lending Report Reviews Debate and Policy Options

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Payday lending in the UK:

a review of the debate and

Payday lending in the UK

Chapter One: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Chapter Two: Background to the payday lending industry . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Chapter Three: The payday debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Appendix A: Comparison of a payday loan to various unauthorised bank overdrafts . . . . . .32

Payday lending in the UK

Payday lending in the UK

Whether there is evidence of consumers becoming trapped in a cycle of repeat borrowing.

ARE PAYDAY LOANS EXPENSIVE?

The level of the specific payday lenders charges.

Payday lending in the UK

DO PAYDAY LOANS TRAP PEOPLE IN A CYCLE OF

Payday lending in the UK

WHAT ARE THE REGULATORY OPTIONS?

the amount of loan relative to the borrowers income

the number of loans that can be provided in any given period

the absolute maximum level of loans.

the number of times a loan can be rolled over

the level of fees that can be charged for overdue loans

include clear standards for dealing with complaints,

provide rules of thumb to guide typical loan amounts

limit the number of roll over loans,

include guidance to ensure misleading advertising is avoided, and

Payday lending in the UK

Payday lending in the UK

Payday lending in the UK

Chapter One: Introduction

Payday lending in the UK

complaints processes and advice to customers

policies on rolling over of loans

Payday lending in the UK

Payday lending in the UK

Chapter Two: Background to

Ownership of UK Payday Lending Operations

Payday lending in the UK

Online Payday Lending

Payday lending in the UK

REGULATION OF PAYDAY LENDING IN THE UK

Payday lending in the UK

BCCA website (http://www.bcca.co.uk/index.asp) accessed on 17th July 2010

CFA website (http://www.cfa-uk.co.uk/aboutcfa.html) accessed on 17th July 2010

Payday lending in the UK

ARE PAYDAY LOANS EXPENSIVE?

Payday lending in the UK

Payday lending in the UK

Payday lending in the UK

The rate cap debate

Payday lending in the UK

Table 4: Cost of a payday loan compared to unauthorised overdrafts9

The cost of an unauthorised overdraft falls as the amount overdrawn increases

Payday lending in the UK

figure one: comparison of payday loan and unauthorised

Interest on principle amount %

Interest on principle amount %

Loan/overdrawn amount (based on 1 month loan term)

Payday lending in the UK

Four key points arise from this analysis.

RBS (Unpaid item fee)

Barclays (Unpaid item fee)

Payday lending in the UK

Payday lending in the UK