Changes to the payday loans market could drive desperate consumers straight into the arms of loan sharks, a North-East academic has warned.
A cap on the amount that payday lenders can charge customers has been announced by the Financial Conduct Authority.
But Professor Mark Davies, of Teesside University’s school of social sciences, business and law, fears the changes will enable loan sharks to strengthen their positions in local communities.
Prof Davies, who has carried out extensive research into the payday loans market and the needs of borrowers, believes the new measures are a positive move, but will not help all borrowers.
“While this is definitely an improvement from a borrower’s perspective, there are a number of remaining issues,” he said.
“In particular, it has been speculated that many payday lenders will leave the market to set up elsewhere or change their business model.
“If legitimate payday lenders leave the industry, this will leave less choice to borrowers, with the possibility of loan sharks strengthening their positions in local communities.”
The changes by the FCA will see payday loan rates capped at 0.8 per cent per day of the amount borrowed. In total, no one will have to pay back more than twice what they borrowed, and there will be a £15 cap on default charges.
“A person in financial desperation, as many of these people are, cannot simply resist a loan,” he said.
“What is needed is a mechanism for identifying and targeting these people at much earlier points, before the pain of irreversible debt mounts up.”
Professor Davies is currently leading a research project to find out more about the types of consumers who consider payday loans and the consequences it has on their lives.
He has gathered detailed accounts from a number of third sector organisations and has held focus groups with people who have taken out payday loans.
“The new regulations are welcome but they will not help all borrowers,” he said. “Some will return to loan sharks.