Unit 3 Micro: Pay Day Lenders Face Competition Probe

The Competition Commission is to launch a full-scale inquiry into the operation of payday loan companies. In the past three years, the payday loan industry has expanded rapidly from £90m to around £2.2bn - a reflection of the increasing financialisation of the British economy. The review will take over a year to complete and a range of actions are possible including caps on the sky-high interest rates that are charged on loans. Average loan interest rates charged by Wonga, the UK’s largest payday lender, are now 5,853 per cent (annual percentage rate). For more on this potentially important competition inquiry - Payday loans industry to face competition inquiry (BBC news)

Brief background on payday loans

• A payday loan is a small, short-term, unsecured loan that is generally expected to be repaid in full by a single payment on the borrower’s next payday or within one month
  
• The average payday loan issued in 2011/12 was for an amount between £265 and £270 over 30 days
  
• The payday market is relatively concentrated, with three companies accounting for 55 per cent of the market by turnover and 57 per cent by value of loans
  

According to the OFT press-release:

"The OFT is concerned that lenders are competing primarily on the availability and speed of loan approval, rather than price. The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers. The OFT is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges. Lenders appear to derive up to 50% of their revenue from such practices."

Channel 4 News