Stop the Payday Loans Scandal

The causes of the current credit crunch lie in the segregation of the credit market that has developed over the past ten years. An initial 'flight to quality' by lenders, combined with the moves to cut operating costs by providing services via cheaper mechanisms such as the internet or via call centres, resulted in many lower income consumers being cut adrift from the market. Closures of bank branches in deprived communities followed. At the same time, however, the competition for 'good credit risks' resulted in a drastic reduction in profit margins in that market. Lenders began to look around for higher profit margins, which involved taking higher risks. Technological advances made greater use of 'risk profiling' techniques possible, and this allowed lenders to identify and target lower income borrowers for higher priced products.

The first signs of this in the UK corresponded with an influx of U.S capital backing sub-prime credit cards. In addition, to raise the profit margins on mainstream lending and financial services, banks began to make excessive charges for default fees - effectively subsidising wealthier borrowers at the expense of those on lower incomes.

However, many banks did not want to be publicly associated with the levels of interest that were being charged to sub-prime or 'higher risk' borrowers. As a result, they either set up subsidiary companies with distinct brands for this purpose, or lent money to a growing range of specialist lenders established to move into the non-mainstream market. Some of these, like door to door lenders have been long standing in the UK, but have boomed in recent years. Others, such as the payday lending industry - a business model imported from the U.S - are relatively new. But they all have in common the fact that their market has grown because mainstream services are not available to people on low incomes and because the lack of price sensitivity amongst low income borrowers means they can 'price for risk' and charge extremely high levels of interest and other charges.

Taking this 'risk' therefore gives greater profit, which has been the motivation for the expansion of sub-prime lending in the UK in recent years.

However, making the poor pay more has its downside. In particular, there is a stronger likelihood of default when tight financial circumstances are stretched to breaking point by high interest loans. The high price of the credit itself increases the risk of default. And when that default comes, as it has in the US sub-prime mortgage market, it affects all of us.

Ironically, the processes of market segmentation are further deepened by the crunch. As banks make less credit available, more people are cast out from the mainstream and into the hands of sub-prime lenders. As we predicted in our joint statement with the European Coalition for Responsible Credit in October 2007, predatory lenders are rubbing their hands at the prospect of trapping even more people rejected by banks in a cycle of credit dependency. This is borne out by the growth of the payday lending industry.

Our briefing, available in the campaign documents section on the right of this page, shows how US lenders have targetted the UK for increased growth. It also highlights the huge cost of these loans, with typical APR's of 1200%.

As a result, we have called for an investigation into the growth of high cost credit in the UK. David Drew M.P has now tabled an Early Day Motion supporting this call, and we will be conducting further research and campaigning activities through 2008. Our previous petition on the number 10 website attracted over 450 signatures in just two weeks and guarantees that a formal response will have to be made by Downing Street. We will post a copy of that response and further materials on this page as they become available.