Payday loans on campus: shackling the sharks

Will Hodges examines short-term lenders and how they're preying on students

With unemployment remaining high and inflation eroding the real value of wages, it's estimated that as many as 1.2 million individuals in the UK are relying on payday loans to make ends meet.

High rates

According to a recent government survey, between 7.4 and 8.2 million short-term loans were issued in 2012. The total value of these is estimated to have grown from just £330 million in 2006 to between £2 and £2.2 billion today. Payday loan firms are able to charge higher interest rates than banks and other financial institutions in return for lending at short notice and with few restrictions.

The representative annual percentage rates (APRs) for many lenders are often set at far over 1,000 per cent, meaning that an individual borrowing £500 on these terms would end up owing more than £5,000 after 12 months.

Worryingly, students are one of the groups being targeted; a recent survey by the National Union of Students (NUS) revealed that as many as 10 per cent of those in further education have taken on a payday loan at some point during their studies.

Loan rangers

Concerns are growing about the practices of many companies operating within the sector as the impact of high interest rates has come to light. In 2012, 20,000 calls were made to the National Debtline service run by the Money Advice Trust, an independent charity. The figure represented a 94 per cent increase on the previous year, and a huge 4,200 per cent increase since the onset of the financial crisis in 2007.

The Office for Fair Trading (OFT), which has the power to revoke licences to lenders, recently undertook a year-long compliance review into the payday lending market. The OFT's report, published this year, criticised the practices of many lenders, citing widespread examples of non-compliance with the Consumer Credit Act and other lending legislation.

The report has led to a government review of the payday loan market, with the Financial Conduct Authority (FCA) drawing up a new set of proposals as to how companies within the sector should be allowed to operate.

Under the terms of the tougher regulations proposed by the FCA, companies would be required to ensure that borrowers taking out a loan are in a financial position to make repayments and would not be able to extend, or "roll over", loans on more than two occasions, avoiding situations where huge financial penalties are accrued for late payments. The way in which lenders market their products is also expected to change. The FCA could order lenders to change misleading adverts and may also be forced to put risk warnings on adverts and marketing material.

The OFT has written to a number of other firms, demanding that they clean up their acts to avoid facing the risk of closure. Martin Wheatley, the FCA's chief executive, said: "I'm putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking."

Called out on campus

Meanwhile, the National Union of Students has launched a campaign to persuade more universities and colleges to ban adverts for payday loan lenders on campus after three universities - Swansea, Northampton and Northumbria - imposed a ban in June 2013.

The NUS national vice president for welfare, Pete Mercer, said: "It's clear that some payday lenders are targeting vulnerable students and the government has so far failed to act so it's important we do everything we can to limit their ability to reach our campuses."

Leigh Whitman is a first year undergraduate at Bath Spa University. Though she herself has never borrowed money from a payday loan company, she's aware of the problems such firms can cause students: "They are a pretty easy way to get hold of cash when you need it," she explains.

"Most companies are willing to lend to students, few questions asked, even though it's pretty obvious they aren't earning enough to pay it back. A couple of people I know have ended up owing much more than they originally borrowed and having to call on friends and family to bail them out. You can stop companies promoting themselves on campus, but that won't stop them advertising to young people on TV and online."

Living on borrowed time?

Whether the measures being imposed by the FCA will have a noticeable impact on the sector remains to be seen. Despite 25 companies leaving the payday loans market during the past 12 months, there are estimated to be more than 200 firms left operating in the UK. While it's possible some smaller companies may struggle to survive in the new financial climate imposed by the FCA, the largest 50 firms, who represent 90 per cent of the market in terms of turnover, are likely to be more resilient to the changes suggested under the proposals.

For the student population, rising accommodation and living costs are likely to lead to an increase in demand for short-term loans, irrespective of advertising restrictions. Payday loan companies, it seems, are here to stay at our universities