Office of Fair Trading to investigate alternative lending industry amid concerns over high interest rates
“It is a low, dirty-looking, dusty shop, the door of which stands always doubtfully, a little way open: half inviting, half repelling the hesitating visitor.” That was how Charles Dickens depicted a pawnbroker’s shop in Drury Lane circa 1835.
Today the industry is keen to shed its tawdry image as tough economic conditions fuel its growth: stores are springing up on high streets around the country as Britons borrow against their family treasures to get them through to payday. But its PR efforts suffered a set back at the end of last week when the Office of Fair Trading (OFT) launched an investigation into payday lending – an increasingly popular service offered by pawnbrokers as well as specialist companies – amid fears some are preying on those in financial trouble. Consumer groups say the interest rates charged on what are designed to be short-term loans are as much as 4,000% APR, and that low-income borrowers often end up rolling over their borrowings and accruing large debts.
The alternative credit industry says it provides a vital service for the 10 million Britons who don’t have access to cash or savings. “It’s the easiness of it,” says Michael, in the queue to redeem his pledges at a broker in north London. “I get paid at the start of the month and I pawn my things halfway through to have a bit of cash until the next time. I know the people I deal with, there is very little paperwork. I don’t want credit cards, never have. I don’t trust what I might do with them.”
The number of pawnbroker shops has grown by 56% to 1,412 since 2009 while the number of payday lenders has also mushroomed, with companies such as Wonga, QuickQuid and The Money Shop becoming household names. Pawnbrokers’ investors, too, have thrived through the economic slowdown. Albemarle & Bond shares, 218p just before the 2008 banking crisis, now change hands at some 340p. Rival Harvey & Thompson has seen its shares climb from 175p to 336p over the same period.
The credit crunch has brought new customers to its doors, but Barry Stevenson, chief executive of Albemarle & Bond, says that for many of its regulars little has changed: “In truth, most people using pawnbrokers were disenfranchised during the boom. We estimated some years ago there were 10 million people who didn’t have access to cash or savings; only about half that number have bank accounts – but no overdraft facilities. That’s the market we are chasing.”
The OFT did not list the companies it has in its sights but will carry out spot-checks at 50 major lenders. Evidence gained will be used to boost standards across the industry. “We are concerned that some payday lenders are taking advantage of people in financial difficulty,” said David Fisher, OFT director of consumer credit. He said the payday sector had grown considerably since it looked at the market in 2010.
The average pawnbroking loan is around £160 with interest charged at 8% a month. Most people redeem their goods after an average of three months. Customers pledge, for the most part, gold jewellery or diamonds and a variety of family heirlooms. Around a quarter of items are unredeemed and then sold on. The former owner receives any profit on the sale after the loan is settled.
Payday loans, usually up to £1,000 at a time, are offered over a short-term window but interest rates and charges are far higher. Consumer Focus estimates the number of payday loan borrowers rose from 300,000 in 2006 to 1.2 million in 2009, but as family incomes have been squeezed it is possible many more have turned to this form of high-cost borrowing.
Joanna Elson, chief executive of the Money Advice Trust, said the growth of payday lending had led to a sharp increase in the number of calls to its debt counselling service: “Just two years ago National Debtline was receiving around 150 calls per month from people with payday loans – that figure has now ballooned to 1,100.”
Hard times are not the only factor to have fuelled sales. The high gold price has been a major boon to the industry – Albemarle has recently created 41 gold-buying “mobile, pop-up” shops.
Meanwhile, Stevenson is a staunch defender of the industry and says there is no longer a stigma attached to pawnbroking: “There’s hardly any bureaucracy and no intrusive checks; we treat people like human beings, unlike a lot of banks.”
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