Online payday lenders will be forced to publish details of their products on at least one price comparison website – a move which has been branded "flaccid" by MoneySavingExpert.com.
From next year, at least one website, possibly more, will allow people to compare the cost of payday loans across various lenders. See MoneySavingExpert.com's Payday loan best buys? guide to check for cheaper alternatives before taking out a payday loan.
The Competition and Markets Authority first announced proposals to force payday lenders on to comparison sites last October (see the Payday loan firms to be forced onto comparison sites MSE News story).
In a report published today, it revealed it will definitely go ahead with its plans, although details on whether or not loans will be listed on existing comparison sites or whether new sites will be set up have yet to be finalised.
The CMA says price comparison websites should provide customers with clear, objective and comparable information on potential loan costs and the total amount payable, and that they should also have a search option so people can easily check the loan amount and duration.
Payday lenders operating online and on the high street will also be ordered to provide existing customers with a summary of the cost of their borrowing. This will include the total cost of their most recent loan, as well as showing how the cost of borrowing with that lender has built up over the previous 12 months and how late repayments have affected their borrowing charges.
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'The payday loan market has never been about price'
Martin Lewis, founder and editor of MoneySavingExpert.com says: "This is a rather flaccid response by the CMA. To lead on 'payday loan price comparison' as its core recommendation seems to indicate it doesn't really understand the payday loan environment.
"While setting up an online price comparison won't cause harm and may help a few people on the periphery, the payday loan market has never been about price. People get these loans due to a mix of easy technology and desperation. If price really made such a difference, no one would be getting any of them in the first place.
"Even for those who do get these online, not via apps or the high street, how will they get to this price comparison site? Both the natural and paid search spots on Google are hugely competitive and are ramped with lenders and intermediaries. And indeed already MoneySavingExpert's 'least worst buys' guide comes top for many people – but gets tiny traffic as people don't search for 'payday loans', they focus on the lender's brand name.
"Thankfully though, the more important solution is that the FCA has already capped payday loan prices, which, while not as low as I'd like, will have far more impact than this belated move ever will.
"In many ways, the more important part of this announcement is the quieter line on people being able to get a quote without affecting their ability to access credit. The FCA's made some progress with this but more can be done to help those applying for a payday loan to understand and limit the potential risks involved."
Which price comparison sites will show payday loans?
The CMA says websites uSwitch and MoneySuperMarket have told it they are not planning to launch a payday loan comparison table, but other sites, including GoCompare, Compare the Market, Confused.com, Money.co.uk and Runpath have expressed an interest in doing so "as long as the right conditions are in place".
If, however, none of these websites do choose to set up payday loan comparison tables, payday lenders will have to set up a price comparison website, which will be authorised by regulator the Financial Conduct Authority (FCA).
Payday loan crackdown
The move follows an investigation into the payday loan market by the CMA, which found that about 1.8 million customers could typically be up to £60 a year better off if it was easier for them to compare fees and charges.
Most borrowers do not shop around, partly because of the difficulties in accessing clear and comparable information on the cost of borrowing, and many also have a lack of awareness of late fees and additional charges, according to the CMA.
The FCA has already strengthened the rules under which payday lenders are allowed to operate and has placed limits on the amounts lenders are allowed to charge as well as the number of times that they can roll a loan over (see the New payday loan rules come into effect MSE News story).
Simon Polito, chair of the CMA's Payday Lending Investigation Group, says: "Even where borrowers do shop around at present, it is difficult for them to compare prices between short-term loans given the differences between products and the limited usefulness of the APR in making comparisons. Few customers find their lender via existing price comparison websites, which suffer from a number of limitations.
"To help them, we are requiring lenders to be listed on price comparison websites authorised by the FCA and have recommended to the FCA that these websites should carry all the information customers need to compare easily the total cost of different lenders' loans.
"This will promote competition and provide the incentive for new and existing lenders to compete to offer lower cost loans and win borrowers' business. It will also make it easier for new entrants that offer lower cost loans to access customers."
Alternatives to payday loans
Before taking out a payday loan, consider other options first, including:
- Use an existing credit card – provided you can clear it in full the next month, it should be interest-free.
- Check if you're eligible for interest-free loans and grants from your local council or job centre. (See our Debt Help guide for more information.)
- Get a 0% credit card – even with a poor credit score. (See our 0% Balance Transfer and Spend guide.)
- Check out your local credit union – these are independently-run local co-operative organisations which aim to assist people who may not have access to financial products and services elsewhere. (See our Credit Unions guide.)
- Ask if you can you borrow from a family or a close friend.
- Extend your overdraft, if you can. But stay within the arranged limit, otherwise it'll cost you big.
Additional reporting by Press Association.