The Competition and Markets Authority found during their market investigation into payday lending that most consumers taking out their first payday loan will return for further credit from a payday lender, and over 80% of loans made by payday lenders are to customers who have taken out a payday loan with them previously.
The CMA said that customers’ demand for payday loans direct lenders is typically recurring. The definition of a payday loan here is the CMA definition, which includes loans substantially repaid within 12 months, but this may be by instalments.
The Findings of The Report
On average, payday loan customers took out a further 3.6 loans from the same lender within a year of their first loan from that lender. Around 40% of customers had a borrowing relationship with their lender of more than one year, although one large lender commented that relationships tended to last 12-18 months.
The CMA found that customers using the same lender typically did so because they were happy with the service provided by their existing lender and their qualitative research suggested in particular customers place value on having a “good experience” with a particular lender, especially given concerns about the reputation of the market. Reasons not related to satisfaction were convenience and not having to go through the application process again, preference for the current lender’s product and an expectation that the current lender is more likely to approve an application.
CMA analysis also showed that overall, 40% of customers took out no additional loans in a year, 14% took out 1 additional loan.
Uncle Buck finds the CMA’s research both interesting and useful. For single repayment products, 4.6 loans per year would mean a funding, repayment and “rest” cycle of around 79 days, or – assuming 30 day repayment periods, a gap of 49 days between loans. This information was based on a detail loan level assessment and is probably the most accurate picture available of the industry – although it dates from 2012/13. So is the average customer who takes the average 4.6 loans in 12 months likely to be in financial difficulty?
Uncle Buck cannot provide a definitive answer to that question. Many consumers on tight budgets experience regular or unexpected expenditure spikes (for example, the start of the school year, school holidays, a wedding invite, an unanticipated car repair, a boiler breakdown, pet expenses). Consumers who have made provision for planned expenses may still be surprised by the cost being in excess of that anticipated and need some help to manage that additional amount, but this does not mean being in financial difficulty. In some cases income unexpectedly reduces. Monthly paid consumers can find themselves juggling a “long” month. Although it is unlikely that consumers may experience very regular and frequent disruptions of this nature it is not impossible.
Uncle Buck assesses each application on its merits and believes it is unfair to decline a customer who has demonstrated an on time repayment record simply because they are a several times repeat borrower, providing that our checks do not reveal any indications of financial difficulty. We will not, however, continually lend without speaking to customers to confirm their circumstances with them.