Payday Loans: Borrowers 'Paying Too Much'
A lack of price competition means payday loan customers may be paying too much to borrow, according to an investigation.
In preliminary findings, the Competition and Markets Authority (CMA) calculated that consumers were forking out up to £10 over the odds for a typical loan - with the bill seen as a cause of concern given that borrowers take out an average six loans annually.
The CMA said it would now be investigating potential ways to increase price competition in the sector, including setting up a price comparison website and creating clearer upfront disclosure of borrowing costs if a loan is not paid back in full and on time.
It suggested the market-wide impact of greater competition would result in total savings for UK customers of more than £45m a year, relative to total revenue earned by payday lenders of around £1.1bn.
Simon Polito, Chairman of the Payday Lending investigation group and CMA Deputy Panel Chair, said: "If you need to take out a payday loan because money is tight, you certainly shouldn't have to pay more than is necessary.
"While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least.
"This can particularly apply to late payment fees, which can be difficult to predict and which many customers don't anticipate.
"'It's not surprising that payday lending customers tend to focus more on availability and speed rather than the cost of loans but even for those who do shop around, it can be very difficult to compare prices, given the difference between products, the lack of transparency on additional fees and charges and the shortage of effective comparison tools.
There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs."
The CMA said its probe was complementing separate action by the Financial Conduct Authority ( FCA) on protecting customers who get into trouble repaying loans.
The FCA is set to launch a consultation this summer which will consider the level at which the overall cost of a payday loan should be capped.
The body, which took over regulation of the payday sector in April, has already required firms to provide financial "health warnings" on emails, online and in texts and to signpost people to free debt help.
From July 1, payday firms will also have to include risk warnings on other forms of advertising, such as print and television.
They will also be banned from rolling over a loan more than twice and they will only be able to make two unsuccessful attempts to claw money back out of a borrower's account by using a type of recurring payment called a continuous payment authority.