Representatives from Britain’s largest payday lending groups – Wonga, QuickQuid and Mr Lender quizzed by MPs, say that their affordability checks are similar to those used by credit card companies.
Payday lenders being grilled by MPs say their affordability checks are similar to those used by credit card companies.
Representatives from the three companies, as well as trade bodies were, questioned about their business practices when they appeared before the Commons business, innovation and skills select committee.
The industry faces a clampdown by regulators after charities said lenders’ behaviour was out of control.
A recent investigation by the Office of Fair Trading (OFT) found that some firms’ business models appear to be based around people who cannot afford to pay their loans back on time, meaning they are forced to roll them over and the original cost balloons.
Asked about advertising stating that lenders can send cash within five or 10 minutes, Andy Lapointe, UK public affairs manager at QuickQuid, said: “That’s from approval.”
Wonga’s business is aiming to lend to people who can pay us back, that’s how we make money. Henry Raine, Wonga
He said the process of credit checking could actually take several hours, adding: “The five minutes is indicating the time that they’re approved.”
Russell Hamblin-Boone, chief executive of short-term lending trade body the Consumer Finance Association (CFA), said: “When you’re transferring money electronically you can do that very quickly.
“If you applied for a credit card, the application process would be as long as if you were applying for a short-term loan.
“The difference would be that you’d have to wait a few weeks for your credit card to come through as opposed to lenders who are able to transfer money directly.”
Read more: OFT sends payday lenders to regulator for investigation
Henry Raine, head of regulatory and public affairs at Wonga, told MPs around one in 33 (3 per cent) customers take loans out for at least 60 days, meaning interest needs to be frozen.
He said: “Wonga’s business is aiming to lend to people who can pay us back. That’s how we make money.
“The vast majority of people pay us back on time. We freeze interest after 60 days and 25 per cent of people pay us back early.”
Mr Raine said around 3 per cent of loans, equating to around 40,000 of Wonga’s 1.25m customers, go to the 60-day period.
He said Wonga’s record compares favourably with the rest of the loan industry, including credit card companies and banks.
Mr Raine added: “We do everything we can to lessen the effect of bad debt.”
Asked if he thought Wonga’s charges are extortionate, he said: “No, of course we don’t accept that… With Wonga the first thing you see on the website is the amount it’s going to cost you. You choose how much to borrow, and for how long.
“The product is actually used moderately by most people.”
With Wonga the first thing you see on the website is the amount it’s going to cost you. Henry Raine
Mr Raine said Wonga’s average loan is for £174 borrowed over 17 days and people are given reminders, including texts to tell them when the loan is due for repayment and telephone numbers to contact if they are having financial difficulty.
The committee hearing pre-empts the transferral of regulatory powers in the consumer credit market from the OFT to the Financial Conduct Authority (FCA).
The new body, which came into being in April, has promised to strengthen protection for consumers.
To do so, it has been equipped with the power to impose unlimited fines and compel businesses to give people their money back when they have lost out due to poor treatment.
New curbs proposed by the body last month will force lenders to place “risk warnings” on their promotions and advertising, urging consumers to “think” before taking out a payday loan.
New curbs proposed by the FCA will force lenders to place “risk warnings” on their promotions and advertising, urging consumers to “think” before taking on a payday loan.
The watchdog has powers to ban adverts if it thinks they are misleading.
Lenders will be allowed to roll over a loan only twice and they will be able to make only two unsuccessful attempts to claw money back out of someone’s bank account under the proposed new rules, which are intended to come into force next year.
The whole industry is under investigation by the Competition Commission, which will produce a report next year.