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Cutting the cost of quick credit

Professor John Gathergood was instrumental in the reform of consumer credit rules – saving borrowers more than £600 million in the process
Vision Business and Economics Cutting the cost of quick credit

Popularised by companies like Wonga and QuickQuid, payday loans – high cost short-term credit, in financial parlance – grew into a huge industry after the financial crash of 2008. By accepting customers who had been denied more conventional forms of credit, they altered the financial landscape and opened up new avenues for lending.

But it wasn’t long before the horror stories began to emerge: borrowers left with unsustainable levels of debt, locked into multiple loans with spiralling charges and total repayments that often far exceeded the amount of the original amount borrowed. Some loans came with interest rates that topped 5,000%.

When the Financial Conduct Authority (FCA) decided to step in, it invited Professor John Gathergood of the School of Economics to lead the analytical team which designed and implemented its Price Cap on High Cost Short-Term Credit. Drawing upon a unique database of more than 15 million payday loan applications in the UK over a two-year period, Professor Gathergood was able to demonstrate in detail the negative effects of payday loans on consumers.

His evidence formed the basis of the FCA’s policy decision to protect the 4.3 million applicants for payday loans in the UK – by limiting the prices that payday lenders can charge.

As a result of the price cap it subsequently introduced, 760,000 consumers have now saved more than £600 million in interest and charges they would otherwise have paid without the cap. The default rate on loans reduced from 14% to 4%; and consumer harm has been reduced, with the Citizen’s Advice Service reporting a 60% reduction in the number of individuals presenting with cases relating to payday loans. Many of these consumers are among the more vulnerable individuals in society who tend to use higher cost credit products.

Research in consumer finance is essential for shedding light on how an ever-changing financial landscape affects individuals’ lives, especially among vulnerable consumers
Professor John Gathergood

The placing of a price cap on payday loans is the most significant act in regulation of consumer financial markets over the past decade. According to the FCA: “John’s work…on the design of a price cap on payday loans in the UK was fundamental in shaping the final policy, which has protected the 4.3 million applicants for paydays loans in the UK.”

A few stats...

 

£600 million

4.3 million

Savings for borrowers

As a result of the price cap 760,000 consumers have now saved more than £600 million in interest and charges

Better protected

4.3 million applicants for paydays loans in the UK are now better protected

60%

10%

Fall in advice cases

Citizen’s Advice Service report a 60% reduction in individuals presenting with cases relating to payday loans

Fall in loan defaults

Thanks to the price cap, the default rate on loans reduced from 14% to 4%

 

Professor Gathergood said: “Research in consumer finance is essential for shedding light on how an ever-changing financial landscape affects individuals’ lives, especially among vulnerable consumers.

“I am inspired by the availability of rich and detailed data together with the broad range of modern statistical methods that allow us to form answers to challenging questions about correlation, causality and consequences in consumer finance. Answering these questions matters – because they are important for individuals’ financial lives.”

His work with the FCA on the payday lending price cap has led to ongoing work on consumer credit markets. The FCA has partnered with the University in a successful £7.5 million ESRC funding initiative, the Network for Integrated Behavioural Science. Ongoing projects with the FCA include work on other elements of the consumer credit market and a collaboration with National Employment Savings Trust, which will see new research on the effects of automatic pension enrolment on eight million UK consumers who have been automatically enrolled into workplace pensions since 2012.

John Gathergood

John Gathergood is a Professor of Economics. He has served as an expert adviser on household finance to the Bank of England, Financial Conduct Authority and the UK Treasury.

Vision magazine front cover - Issue 4, Autumn 2019

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