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UK takes on payday lenders

October 9, 2014

The United Kingdom's competition authority has announced plans to improve deals for borrowers of short-term credit, known as "payday loans." The initiative would force lenders to come clean online.

https://p.dw.com/p/1DSYC
An ad for payday loans
Image: Nik Martin

Britain’s competition watchdog said Thursday it wanted to launch price comparison websites for short-term lenders to help consumers shop around for better credit deals online.

The new rules are meant to stimulate competition among so-called "payday lenders," creditors that provide quick, unsecured loans with high interest rates. They would also prevent a price cap on interest rates imposed by another consumer protection agency, the Financial Conduct Authority, from becoming the going rate charged by all lenders.

The proposal by the #link:https://www.gov.uk/government/organisations/competition-and-markets-authority:Competition and Markets Authority# (CMA) would aim to make such lending schemes more transparent by offering debtors the opportunity to compare information between lenders, such as late fees and interest rates.

Andrea Leadsom, the financial services minister, said the government was "determined to tackle the problems in the payday lending market and protect consumers."

Predatory lending?

Short-term lending is booming in Britain. With some 2 million borrowers, payday loans have grown into a nearly 3 billion-pound (3.8 billion euros, $4.8 billion) industry. The government in London has repeatedly criticized payday lenders for failing to carry out required credit checks meant to prevent borrowers from racking up too much debt.

"Too many people are given loans they cannot afford, and when they can't repay are encouraged to extend them, exacerbating their financial difficulties," a 2013 #link:https://assets.digital.cabinet-office.gov.uk/media/532ad55eed915d0e5d00038d/oft1481.pdf:report by Britain’s Office of Fair Trading# found. "This is causing real misery and hardship for a significant number of payday users."

Last week, Britain's biggest payday lender, Wonga, announced it would write off 330,000 customers’ debt worth some 220 million pounds after regulators forced it to overhaul its questionable lending practices. Wonga charges an annual interest rate of 5,853 percent, according to its website.

Lenders have until the end of the year to respond to the CMA's proposal.

pad/cjc (Reuters, Competition and Markets Authority)