Affordable lenders 'need £450m aid'
A £450 million levy on the consumer credit industry should be used to create a "new generation" of affordable lenders to take on Britain's legal loan sharks, a leading think tank has said.
A report by the Institute for Public Policy Research (IPPR) said it supported "overdue efforts" to clamp down on "the worst practices in the payday lending sector".
The one-off levy would provide compensation for the "direct financial harm" caused by the £180 billion consumer credit market and restructure the "toxic payday loan debt" on many household balance sheets, the IPPR said.
UK households collectively owe nearly £160 billion in unsecured consumer credit, with low-income households "vulnerable to exploitation by unscrupulous firms", it added
In its report, Jumping The Shark, the think tank has called for an Affordable Credit Trust (ACT) to mobilise not-for-profit institutions to compete with firms such as Wonga, Quick Quid and Payday Express.
The rise of payday loan companies which charge "eye-watering fees" was one of the most "visible manifestations" of the "morbid social and economic symptoms" of the financial crisis, it said.
Among the IPPR's proposals, payday lenders would be forced to provide a clear "pounds and pence" cost for any potential loan, along with the payment rate and term length.
Companies would also have to carry out mandatory affordability checks before a loan is agreed, include bank overdraft charges within the planned cap on the cost of credit and enforce a 24-hour "cooling off" period between a loan request and cash being paid, the IPPR said.
The ACT, a non-Government body, would use a range of local not-for-profit institutions which lend "small amounts at affordable rates to ordinary people", it added.
Not-for-profit lenders and credit unions could be hosted by the Post Office, the Church of England or Unite, which recently set up a credit union service for the union's members, the think tank said.
Loans would initially be limited to £250 - about the level of an average payday loan - with members limited to one ACT-backed loan at a time, the IPPR said.
Lenders would charge a maximum of 3% a month, or 42.6% APR, meaning a loan of £100 for one month would cost £3 - compared with £30 with a similar loan from Wonga, the IPPR said.
The report said: "The explosion of high-cost payday lending in recent years has been one of the most pernicious consequences of the economic turmoil of the last few years.
"Our analysis finds that it is the result of a combination of market excesses and state failure, with individuals, families and civil society not powerful enough to resist and respond.
"The proposals set out in this paper aim to rebalance the fight, empowering individuals and institutions to help each other, and help themselves."
The payday lending industry now supplies more than eight million loans annually, expanding from an estimated £100 million worth of loans in 2004 to over £2.2 billion in 2012/13, the IPPR said.
Mat Lawrence, one of the report's authors, said: "A return to rising living standards will reduce households' reliance on debt, but it will not eliminate their need for it.
"The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill. Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.
"Britain needs an initial capital injection to expand the provision of affordable credit and new 'match saving' incentives for people on low incomes to enable people to build up a stronger asset base of their own and reduce their reliance on credit.
"We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions."
Citizens Advice chief executive Gillian Guy said: "Payday lenders have set a debt-trap for struggling households. In the battle to make ends meet people are turning to short-term loans just to get by. A lack of checks, high interest rates and fees means what is supposed to be a quick fix turns into a long term nightmare.
"It's not just payday lenders that are preying on the worst off. Citizens Advice expects up to 60,000 log book loans to be taken out this year - 61% more than in 2011. The industry brings together the worst of payday lenders and bailiffs with its threatening tactics, high interest rates and failure to check if people can afford to repay loans.
"People need more options for short-term credit. There is a gaping hole in the market which allowed the boom in payday loans. The time for a responsible alternative in the form of a micro-loan is long overdue.
"It is important creditors pay to help people who are in debt. The FCA levy on consumer creditors should add to money for debt advice via the Money Advice Service, not be used to reduce the amount existing contributors have to give."
One in four people who come to Citizens Advice for help have a debt problem, the charity said.