Expensive Lending in Northern Ireland
Introduction
Expensive legal lending – a definition Expensive legal lending refers to any aspect of licensed legal lending where the rate of interest or APR is significantly above rates offered by banks. In its ‘Review of High Cost Credit’ (2010) the Office of Fair Trading describes the high cost credit sector as consisting of pawn broking, payday and other short term small sum loans, home credit and rent-to-buy credit.
This report, looking at expensive legal and illegal money lending in Northern Ireland, was commissioned by the Centre for Economic Empowerment and was carried out by NICVA Research and Advice NI.
Since the economic downturn began in 2007 there has been a significant growth in expensive legal lending, including short term cash loans known as payday lending. The number of people taking out payday loans in the UK is estimated to have quadrupled between 2006 and 2010 (from 0.3 million to 1.2 million).[1]
There is also anecdotal evidence that there has been a rise in the use of ‘loan sharks’ - illegal money lenders. According to one estimate, in the UK there was an increase of 22% in illegally sourced credit between 2006 and 2010.[2]
This trend reflects the growing difficulty faced by many households to make ends meet in the context of reduced employment, rising living costs, and the ‘credit crunch’.
Payday lending – a definition A payday loan is a short-term advance designed to tide you over financially until payday. Some payday loan companies allow you to choose the repayment period, rather than basing it on when you receive your salary. The payday loan is usually paid straight into your bank account, often within 24 hours of an application being approved. The payday loan repayment, plus interest, is then taken directly from your bank account on the due date. The typical charge is about £25 per month for every £100 borrowed. Advertised interest rates (APRs) are typically around 1,750%. Source: http://www.which.co.uk/
High cost borrowers primarily,
• have below average incomes;[3] • are unable to access credit from mainstream lenders;[4] • use the loan to pay for everyday household expenses and unexpected emergencies, (as opposed to luxury items).[5]
This paper highlights some key concerns in relation to payday lending and loan sharks. It is based on a literature review, interviews with key stakeholders,[6] and an online eConsultation which invited debt advisers and their clients to share their experiences of expensive lending.[7] The paper will be used as a basis for discussions on how to address these issues.
[1] Consumer Focus, Keeping the plates spinning – Perceptions of payday loans in Great Britain, August 2010. Exact figures for Northern Ireland are not available.
[2] The Financial Inclusion Centre, The Real Cost of Christmas: Assessing the impact of illegal lending on consumers, January 2010.
[3] For example, Consumer Focus (2010) found that almost half (46%) of household that used payday loans in 2009 had an income below £15,499. Two thirds (67%) had an income below £24,999.
[4] PriceWaterhouseCoopers, Precious Plastic: All change please, 2012.
[5] For example Which? Half of people with payday loans cannot afford to pay back their debts, November, 2012 found that while 11% of payday loans were used for holidays, the remaining 89% were for items such as food, fuel, bills, and unforeseen emergencies.
[6] Interviews were conducted with MPs Naomi Long, Gregory Campbell, Margaret Ritchie and Mark Durkan; MLAs George Robinson, David Hilditch, David McIlveen, John Dallat, Judith Cochrane, Ross Hussey, Roy Beggs and Sandra Overend; Trading Standards Service, Ulster Bank, Danske Bank, Advice NI Debt Advisers, Christians Against Poverty, Families Against Substance Abuse, Consumer Council for Northern Ireland, the Irish League of Credit Unions, and the Ulster Federation of Credit Unions.
[7] Advice NI facilitated the eConsultation at http://www.voiceni.net/ (‘Find Your Voice, Have Your Say’) and it generated over 50 responses.
This report is part of a series of research on the Northern Ireland economy. You can see the rest of our reports here.
Hubs
- centre for economic empowerment
- policy public affairs