All change for Payday Loan Price Comparison Websites.
We are probably all aware of what a Price Comparison Website (PCW) is, but for those who are not familiar, take a look at the likes of Go Compare, Compare the Market or Money Supermarket. All of these site allow those seeking financial products or services, such as insurance, to compare the cost of some of these products. For a majority of these sites, when you enter your details and the details of the product you want, they electronically contact all the providers they have on their database and each provides a quote based on the information provided. The website then presents these quotes to you, usually in ascending order of cost, as well as listing some of the other features of the product. Of course there is normally the ability to apply different filters to the results or sort on a different basis to simply the cost.
The Payday (Short Term) Loans market also has a number of PCW’s which list the loan products available from the lenders who subscribe to them. While up until now, these PCW’s need to be regulated by the Financial Conduct Authority (FCA), as this activity is considered ‘credit broking’, there have not been any specific rules on how the data has been presented or ordered on these sites.
While this is not true of all Payday Loan PCW’s, as most of these are ‘businesses’ that are trying to make money, the order of the listing is not always based on the cost of the loan. What is more common is that the lenders are listed in order of the amount that they will pay the PCW for each potential borrower that clicks their link. While this may be good for the PCW, it could mean for the consumer, the lender at the top of the list is one of the most expensive. It is then up to them to re-order the list or scan down it to find the best deal possible, something many borrowers do not realise.
So what’s changing? Let’s rewind to August 2015. The Competition & Markets Authority (CMA) completed an investigation into this market and decided that they needed to increase price competition. Because of the nature of the product, many lenders clustered around the same price point. This was because borrowers were less concerned about the cost of the loan and more worried about finding one that would lend to them. This in turn meant there was no incentive on lenders to lower price to get more customers, just pay more to get to the top of the PCW listings!!! The CMA’s way to increase price competition among lenders was to insist that PCW ranked them in order of loan cost. In this model, if you want to rank higher on the list, and therefore be more likely to be chosen by the borrower, then you have to drop the cost of the loan. This will have the effect that lenders will undercut each other on price and that will mean some competitive loan deals for the borrowers.
In addition to this, to help promote these comparison sites, by a given date every High Cost Short Term Lender has to be listed on at least 1 of these PCW’s AND display a link to it from their own site. This was to encourage the customer to compare and contrast the loan they were considering with others in the market.
While the CMA made these requirements, and gave guidance to how the PCW’s should work, the task was assigned to the FCA to devise and implement as set of rules to how a Payday Loan PCW would be required to operate. The final regulations consisted of 2 key parts.
Firstly, as of early December 2016 all Payday Loan PCW’s will be required to be “FCA Authorised PCW’s”. Any business wanting to operate a PCW within this market must make it confirm to the new regulations. This will effectively stop businesses providing any form of quasi payday loan comparison service outside that of being an authorised site following the new rules.
The more fundamental requirements are around the listing requirements. As already mentioned, this will be based exclusively on the Total Amount Payable (TAP). The TAP is therefore the sum of all of the charges and interest related to the loan as well as the amount that has been borrowed.
The PCW must allow the borrower to enter the value and duration of loan and then list all available loans meeting that criteria in increasing TAP order (lowest first).
After this regulation comes into force, borrowers using PCW will know that if they choose the lender at the top of the list then they will get the cheapest deal available from that PCW. So should you always go for that one?
While it is true that the lender at the top of the list will be the cheapest of the lenders that that PCW compares, there are a few other things that should be taken into account before making the final decision to apply.
Firstly, it is worth noting that not every lender will appear on every PCW. You may find that if you search a different PCW that there will be cheaper deals available. Secondly, you may want to see what the costs are if things do go wrong (as these are not included in the TAP). While you should never enter a loan agreement if there is a likelihood of not being able to keep up repayments, some lenders may charge a fee if you do, whereas others don’t. A look at the FAQ’s on the lenders site may give a good early indication of this, and of course it would be in the loan agreement as well. Finally, it is worth researching lender reputation, maybe via the various financial forums. A lender with a bad reputation may be worth avoiding, even if they are the cheapest. Just one word of caution with using customer feedback on these forums; make sure you take a balanced approach and do not rely on one entry alone. A customer who has just been turned down for a loan, or one that has been taken to court because they have refused to pay the loan back, may not be the best judge of the true reputation of the lender.
Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk
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Author: Internal Compliance Department