Payday loan sector under further strain

Payday loan companies are under strain because of a rise in compensation claims lodged by customers who were mis-sold loans they could not afford. Similar concerned caused the collapse of the former industry leader Wonga in 2018 and The Money Shop in June 2019.

Now, Quickquid is the latest payday loan company to close it’s UK operations.

David Fisher, chief executive of Enova, the company behind QuickQuid, has laid the blame firmly at the door of the financial ombudsman, that settles disputes between lenders and customers, for changing its criteria on its complaints process.

“Over the past year and a half, we have experienced a challenging and uncertain regulatory environment in the UK, even though the FCA (Financial Conduct Authority) reviewed and approved our business practices and affordability criteria in 2015. FOS, the financial ombudsman, has continued to move the goalposts with its complaints handling decisions, in effect setting ever-changing de-facto policies that in many instances was inconsistent with FCA guidelines,” Fisher said.

QuickQuid’s website claims to have served “1.4 million customers and counting.”

Is this the end of the payday loan bubble?

The payday sector has been heavily criticised over the way its business model operates and the way it treats its customers. Wonga had used high-pressure tactics to get their customers to repay their loans, and QuickQuid charged an astounding interest rate on their loans.

For example, a QuickQuid customer taking out a £250 loan for three and a half months is charged interest rates equal to an annual percentage rate (APR) of 1,300%, according to an example on the lender’s website.

QuickQuid’s troubles have placed further pressure on the payday loans sector, which is still recovering from Wonga’s collapse. A surge in complaints contributed to the failure of the pawnbroker and payday lender The Money Shop, and Wonga itself. Wonga itself had interest rates equalling 5,000% APR!

In 2014, the Financial Conduct Authority brought in new regulations to halt the misselling of payday loans to customers including a cap on payday loans fees, that kept lenders from charging more in charges and interest. The resulting change in legislation caused several payday lenders to struggle to adhere to the new rules.

Those rules not only restricted lenders’ revenue but resulted in a spike of customer complaints who said they were unable to afford the loans they were sold. The subsequent allegations sent to the Financial Ombudsman Service resulted in thousands of pounds of fees being refunded to these mis-sold customers.

Are payday loans still affordable?

A payday loan is deemed affordable if a borrower can repay it without getting into financial hardship, falling behind on bills or additionally having to borrow again. However, too many QuickQuid customers were left will little money after they repaid their loans that had to keep borrowing for months and even years.

When the customer was given this additional loan, it was deemed unaffordable, and thus the payday loan lender must refund the interest they charged to the customer, says the Financial Ombudsman. Hence, QuickQuid customers are being refunded thousands of pounds because of this business model.

Those payday loan lenders who remain on the right side of the regulations have seen a surge in applications demonstrating that the industry is still relevant, especially in the immediate aftermath of the financial crisis and its subsequent credit crunch.

It should be noted though, that applying for a payday loan should be the last option. Borrowers should consider other credit alternatives first.

About the author

David Bailey-Lauring is a single father of three boys and a content writer and regularly writes about personal finance, business, education and tech in the UK, USA, and Europe.