Payday lenders extend loans for small sums to borrowers who are supposedly able to repay the loan on their next pay day, or when they next receive a welfare benefit payment. Payday lenders typically charge extremely high interest rates but will accept large numbers of borrowers who are unable to gain credit elsewhere and will get the loan to them fast. Many of these borrowers, however, struggle to repay the loans and are hit by the high interest rates.
In the years following the 2008 financial crisis, a squeeze on household budgets saw more households turn to payday lenders. Estimates of exorbitant annual interest rates charged by some payday lenders in the UK ranged between 4,000 per cent and 16,000 per cent, and there was a call to cap loan interest rates. US payday lenders were said to have been targeting the UK market because interest rates on borrowing had been capped in many US states. Rate caps are also already in use in other countries including Germany, Canada and parts of Australia.
In March 2013, the UK Office of Fair Trading, gave UK payday lenders 12 weeks to change their business practices or risk losing their credit licences. An OFT investigation found that up to half of payday lenders' revenue came from loans that were not paid back on time and were rolled over or refinanced. In addition, the OFT claimed, payday loan providers compete on the speed with which they agree credit rather than the cost of the loan, which distorts the incentive to carry out proper affordability assessments.
The OFT estimated that payday lenders provided £2bn-£2.2bn worth of loans in 2011/12 against £900m in 2008/9.