Cheque Cashing - Will we learn from the U.S?...
25th February 2003

Research highlights payday lending rip off

As part of its review of the Consumer Credit Act, the DTI commissioned research last year on the trends present in the US Consumer Credit market. The research, conducted by Edgar Dunn and Company, indicated that there had been a "significant growth in payday and title loans that have been comparatively unregulated and have added to the debt burden of those least able to repay". The term "payday loans" in the US refers to the practice of cheque cashing agencies to provide an upfront loan to a customer who gives them a postdated cheque (to be cashed in by the lender on the customer's payday). Despite the research, it appears that little is being done - or proposed - to regulate this aspect of the market in the U.K.

Some of the worst aspects of cheque cashing relate to the lenders practice of allowing "rollovers". This practice allows borrowers to continue to defer the date on which their cheque is cashed by the lender by paying another weeks interest on the loan. For example, the US Public Interest Research Group (PIRG) report - "In a typical payday loan, a consumer writes a personal check for $115 to borrow $100 for two weeks (until payday). The Annual Percentage Rate (APR) on this loan is 390%. At the end of the two week period, the consumer often "rolls the loan over," or pays an additional $15 to carry it for two more weeks, increasing the finance charge on a $100 loan to $30." The charges are frequently hidden from borrowers and although initially high, frequent rollovers can raise the level of the cost to the borrower to dizzying heights.

So what about the U.K? Well, rather than introduce regulation with teeth, we appear to be relying on the lenders to regulate themselves through a Code of Practice introduced by the British Cheque Cashers Association (BCCA). Unfortunately, the BCCA code does not address the issue of rollovers - although Debt on our Doorstep has written to them requesting details of their position on this. But we do have a lot to learn from the US, particularly their consumers, who call for the use of statutory interest rate limits and legislation to tackle the problem. If you want to learn more then check out PIRG's site here