Is payday loan comparison really the answer?

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The Competition and Markets Authority (CMA) has revealed its initial proposals to make the payday loans sector more competitive and help borrowers get a better deal.

But with more than half of payday loan users having some form of serious debt problem within the past five years, is a price comparison website for payday lenders the answer?

The proposals

As well as an accredited and independent price comparison site giving customers a quick and accurate overview of the products available, the CMA wants clearer information available about late fees and charges.

Borrowers would receive statements from each lender, summarising the charges they've incurred over the past 12 months, so they can see how much they are spending.

They should be given the opportunity to shop around, or assess their eligibility for particular loans or products, without damaging their credit records.

And real-time data sharing - who is applying for what, credit records, and so on - is recommended, to help prevent lending to people with debt issues and outstanding loans.

Following a lead

The CMA also wants the role of lead generators made clearer.

Lead generators are websites that sell potential borrowers' details to lenders. Customers are generally unaware that their details are sold to lenders based on the fees offered, rather than the most suitable or cheapest loan on offer.

StepChange Debt Charity's Peter Tutton welcomed the CMA's proposal, saying:

"Financially vulnerable people need... not to be misled by firms who look like lenders but sell their personal information on. We see the results in people being bombarded by calls and texts offering payday loans, fee-charging debt management services and other potentially risky financial products and services."

Interest and the rest

APRs may not be as important when the typical payday loan is £260 for three weeks, but for the third of customers who don't repay their loans in full on or before the agreed date, late payment fees and charges make borrowing far more expensive.

Earlier this year, the Financial Conduct Authority (FCA) proposed changes to the payday loans market which would see interest and fees being capped at 0.8% per day, and fixed default fees no greater than £15.

But several organisations have told the CMA that payday loan customers are typically more concerned with the speed and availability of the loan than with how much it costs, including the Association of British Credit Unions (ABCUL), whose chief executive Mark Lyonette said:

"We do not believe that the evidence of how lenders and borrowers relate in this market offers any support for the notion that a lack of information or comparability is driving poor decisions and high prices."

This is backed up by the CMA's own research, carried out by TNS [pdf] which suggests most customers go straight to the lenders' websites, use search engines to look up lenders by name, or look for "payday loans" online then go with one of the top search results or a name they recognise.

Ignoring the other options

Most price comparison websites - including Choose - have decided not to list payday lenders, in part because of the industry's reputation.

Those that have stress their high standards - one insists on the completion of a 70-question form before considering accepting lenders.

They also say they don't draw attention to the presence of payday comparisons on their sites, in order to avoid customers looking for other products leaving the site with a loan.

So is price comparison the answer? We think not.

At the very least, any comparisons should show total possible costs - including late payment charges and other fees. There's resistance to this idea, with the suggestion that it would put off cautious customers.

A better option would be to show the cost of borrowing the same amount through other means - making people aware of those options, and how much less they can cost, with the aim of making sure customers get the most appropriate service.

Gillian Guy of Citizens Advice agrees, saying:

"Being able to compare prices and understand the full cost, including late fees, is important. But borrowers also need more choice. There is an opportunity for banks to enter into the market and provide a responsible alternative to payday loans."

But the fact remains that for many seeking credit - particularly the worse-off and more vulnerable - convenience, advertising, and availability trump finding something more sustainable and affordable.

And it's debatable whether giving payday lenders more advertising space is really the answer to help a nation struggling with problem debt.

That is the issue the Government, local authorities, and the industry should be considering.