Do MPs understand payday loans?

the money shop©

YESTERDAY the Consumer Finance Association (CFA) released some interesting research comparing policymakers' perceptions of payday loans with the views of people that actually use them.

The YouGov study, which polled 300 customers of The Money Shop and the same number of politicians, found that almost nine in ten customers felt that the fees and charges on their loan had been explained clearly.

Just one in ten policymakers agreed.

Similarly, 93% of customers felt that their lenders treated them with "dignity and respect" while only 5% of policymakers agreed that was true of short term loan providers.

"This research clearly shows that the people who actually use payday loans are extremely satisfied with them at every level," John Lamidey, chief executive of the CFA said of the results.

This research clearly shows that the people who actually use payday loans are extremely satisfied with them at every level.
John Lamidey, chief executive of the CFA

The CFA is, by the way, a trade association dedicated to promoting the interests of its membership. That includes some of the UK's biggest short term lenders like Quick Quid and Payday UK.

As The Telegraph emphasises, then, the takeaway is that the CFA members are feeling a little hard done by and misunderstood by the MPs intent on regulating them into oblivion.

Do they have a point?

Let's leave the, inevitably biased, CFA/YouGov study aside for a minute. Do the CFA have a point?

After all, the survey's results do show that many people are happy with the service they receive from the payday lenders.

Could it be the case that policymakers on the warpath are singling them out unfairly?

Certainly, it sometimes feels that way.

For example, in the Financial Services Bill debate last week Steve Rotheram, MP for Liverpool, Walton, reported that one of his constituents, "thought he had had a particularly good deal because the APR [on his loan] was at 5,200%. He thought that that was better than what the banks were offering, which was obviously just a two digit figure."

The implication here, as so often in these discussions, was that anyone taking out a high interest loan is foolish not to go elsewhere.

But it's not obvious that a "two digit" APR is the alternative.

Unauthorised overdrafts, for example, can charge the equivalent of thousands of percent APR over short periods of time and, for many, they're the main alternative to payday lenders.

So it isn't always the case that those using payday lenders "do not understand the ramifications of those high interest rates", as Mr Rotheram went on to say, rather that they are often making the best choice in an environment where choice is limited.

Coming down hard on payday lenders or, as some advocate, increasing financial education won't solve the need for lending or the initial lack of choice.

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On the other hand

On the other hand, if politicians supporting further regulation of the payday market sometimes exaggerate to the point where all short term borrowers are helpless victims it's because victims of high interest loans aren't hard to find.

In early 2011, Citizens Advice reported an increase in cases involving payday lenders of 200% within just two years.

And, as Which's 2011 research showed, many short term lenders fail to meet their basic responsibilities as financial services providers.

Those using The Money Shop, one of the UK's largest payday providers and certainly one of the most visible on the high street, aren't representative of all payday users.

All in all, it's no surprise that the payday lenders feel under siege: MPs understand the deep failings of the payday market a little better than the CFA would like, even if they don't always see the ways they benefit consumers.

Let us know what you think in the comments below:

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