Not everyone suffers when the economy takes a turn for the worse. In Britain, the payday lending industry benefitted greatly from the financial crisis that began four years ago.
Payday loans are short-term financing for small amounts of money that carry a high rate of interest. When banks say no, more Brits are turning to this financing to pay bills and fund holidays.
Payday loans are usually for less than £1,000 and feature a term no longer than one month. With these loans, APR can be a very scary figure.
It is quite large, sometimes reaching 4,000 percent or more, because this financing is not intended to last for a few months, let alone a year.
Wonga reports a typical loans APR of 4,214 percent. Rivals include QuickQuid, The Money Shop, Payday UK, and Quicksilver, each of which also offers rates much higher than loans bank provided.
When the traditional consumer credit market contracted, payday lenders stepped into the vacancy. As the economy continued its downward spiral and living expenses increased, business began booming for the payday lending industry.
Storefronts popped up on notable high streets in Britain and ads from payday lenders appeared on radio, television, and public transportation. These no credit check loans are promoted to cover everything from travel expenses to visit a dying relative to lavish vacations.
Consumer Focus, a watchdog group, estimated that the number of Brits using a payday loan quadrupled between 2006 and 2009, which saw 1.2 million Brits borrowing a total of £1.2 billion.
One analyst firm reported that by 2010, the amount of payday borrowing had reached £1.7 billion. This January, the housing charity Shelter reported that nearly one million people had used a payday loan to help cover mortgage or rent expenses within the previous year.
In Britain, payday lending is less regulated than it is elsewhere. However, the Office of Fair Trading (OFT) set out to address this in February, launching a comprehensive review of the industry due to concerns that financially troubled Brits were being exploited by some unscrupulous payday lenders.
With a mission to enforce consumer protection regulations, the OFT has already taken steps against some payday lenders found to be in violation of established guidelines.
Payday lenders promote their services as being smart alternatives to unauthorized overdrafts and illegal loan sharks. According to Consumer Finance Association Chief Executive John Lamidey, hundreds of thousands of people have successfully used payday financing.
Mr. Lamidey said that payday lenders who are not members of the industry body are causing problems for the sector and he believes they will either be purchased or go out of business.
Mr. Lamidey pointed to the ease and simplicity of obtaining payday loans and noted that consumers do not want to be saddled with long-term debt.
Though Consumer Focus reported that nearly 30 percent of loans are not repaid as scheduled, Wonga has reportedly reduced its non-repayment rate to seven percent using a credit risk algorithm.
The lender also claims that it discourages repeated borrowing and enforces a cap on automatic extensions.