Payday loan changes could allow loan sharks to circle

Changes to the payday loans market could drive desperate consumers straight into the arms of loan sharks – a Teesside University academic has warned.

A cap on the amount that payday lenders can charge customers has been announced by the Financial Conduct Authority.

But Professor Mark Davies, of Teesside University’s School of Social Sciences, Business & Law, fears the changes will enable loan sharks to strengthen their positions in local communities.

Professor Davies, who has carried out extensive research into the payday loans market and the needs of borrowers, believes the new measures are a positive move, but will not help all borrowers.

'While this is definitely an improvement from a borrower’s perspective, there are a number of remaining issues,' explained Professor Davies.

'In particular, it has been speculated that many payday lenders will leave the market to set up elsewhere or change their business model. If legitimate payday lenders leave the industry, this will leave less choice to borrowers, with the possibility of loan sharks strengthening their positions in local communities.'

The changes by the FCA will see payday loan rates capped at 0.8% per day of the amount borrowed. In total, no one will have to pay back more than twice what they borrowed, and there will be a £15 cap on default charges. The FCA hopes the new regulations will deter people from seeking loans, but Professor Davies argues it is not that simple.

'A person in financial desperation, as many of these people are, cannot simply resist a loan,' he said.

'What is woefully needed is a mechanism for identifying and targeting these people at much earlier points, before the pain of irreversible debt mounts up.'

Professor Davies is currently leading a research project to find out more about the types of consumers who consider payday loans and the consequences it has on their lives. He has gathered detailed accounts from a number of third sector organisations and has held focus groups with people who have taken out payday loans in order to find out more about the market.

'In the interviews we have conducted within this region, we found that borrowers, through no fault of their own, are sometimes plagued by unexpected events that savage any minimal savings they have, and find themselves in circumstances in which they have no foreseeable option but to take out a loan,' explained Professor Davies.

'The new regulations are welcome as they signal a need for transparency in the business. But they will not help all borrowers. Some will return to loan sharks for several reasons.

'Loan sharks have built up strong social connections and networks within local communities that make them more culturally acceptable than lenders such as credit unions. Reflecting from our in-depth interviews, the bonding loan sharks cultivate with local communities has a very strong impact on what borrowers feel they should do.

'The outwardly friendly projection of loan sharks lock borrowers into relationships with providers that they struggle to extricate themselves from.'

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