The slow death of payday lending

A decade ago payday lending barely existing in the UK. Short-term cash flow crises were handled by pawn shops, overdrafts, credit cards and, for some unlucky few loan sharks.

Then Wonga arrived offering us all instant cash that we could repay when our monthly pay packet hit our account. Money in minutes from a friendly company advertised by cartoon grannies was an instant hit and many people started borrowing.

Over the 10 years since Wonga’s arrival the dark side of payday lending has become clear to most people. The interest rates are astronomical, over 1,000 per cent APR in many cases because of the short repayment deadlines - and people have found themselves stuck in a cycle of debt borrowing from one payday lender in order to repay another.

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Also, traditional lenders have taken a very dim view of this short-term lending. A payday loan on your credit file can make or break a mortgage application.

The tide started to turn against payday lenders back in 2014 when the Financial Conduct Authority (FCA) introduced new regulations for the industry. Wonga was ordered to pay £2.6m compensation to borrowers who had been subject to dodgy debt collection practices including receiving letters from fake law firms demanding payment.

Then last year a cap was introduced on how much interest they could charge.

Google strikes the death blow?

The latest blow came this week with Google announcing that it is banning ads from payday lenders. The internet giant has categorised the lenders as dangerous and will now ban them alongside ads for weapons and hate speech.

“It is possible Google’s move could have more impact on curbing the industry than government regulation,” says the BBC.

Despite the FCA’s action there are still numerous payday lenders operating in the UK, so curtailing their ability to advertise could seriously affect their business.

Wonga is certainly suffering already. Earlier this month the lender revealed revenues fell from £217.2m in 2014 to just £77.3m in 2015 resulting in a pre-tax loss of £80.2m. The firm has halved its lending as it tries to focus on being more responsible and move away from its payday routes.

Should I borrow?

The FCA may have imposed price caps but payday lending is still an incredibly expensive way to borrow. If you take out a loan for £250 from Sunny.co.uk for 30 days you’ll pay £60 in interest and fees. That’s an astronomical 1,250 per cent APR.

Numerous payday lenders have sprung up over the past decade but it is telling that not a single major lender has jumped on the bandwagon. The big names have stuck to responsible lending to avoid their names getting further tarnished.

If you need to borrow money you should look at getting an overdraft – many are completely free if they are for small amounts – or taking out a credit card.

First Direct, HSBC, Post Office Money and Nationwide all offer current accounts with free overdraft facilities.

Alternatively, Sainsburys Bank and Post Office money have credit cards with zero per cent interest on purchases for 27 months. If you are worried about whether you will be approved for a credit card use a comparison site such as TotallyMoney.com, which will do a soft search on your credit file and tell you which credit cards are likely to accept your application.

Finally, consider taking out a loan from a credit union. They tend to consider people who might be turned down by mainstream lenders and there is a cap on how much interest they can charge: three per cent a month in England, Scotland and Wales, two per cent in Northern Ireland.

Just be aware that you have to meet criteria to join a credit union – either based on where you live or your occupation. You can search for a suitable one at Findyourcreditunion.co.uk.