Academics at Newcastle University have suggested a ban is imposed on people taking out credit during the night, after finding that payday loan borrowers are more likely to fall into arrears if they take out their loan between 11pm and 7am.
The authors of the report, entitled Digital Credit, Mobile Devices and Indebtedness, conducted in-depth interviews with 40 payday loan borrowers and various debt organisations. They also analysed 30 digital borrowing websites and conducted interviews with the designers of these sites.
Another serious concern raised by the academics is that many loan websites use ‘sliders’, where applicants can move the sliding bars to see how much they would need to repay for various loan amounts and over various terms. The report suggests that people could be falsely re-assured by the fact that they are borrowing much less than the maximum amount on the slider.
The authors even went as far as to say that the speed with which online credit can be provided, and the ease of obtaining it, encourages consumers to see the amounts they receive as cash, and not as debt that needs to be repaid. Another concern is that the speedy application process may be designed to minimise the chances of the applicant deliberating over whether to take out the loan.
The next issue raised in the report was that digital applications can be attractive to people who wouldn’t want to face the prospect of being rejected by a real person.
The researchers were also concerned by the fact that if an application is made digitally, this then allows lenders to target customers with messages through mobile devices. They say that once a lender is in possession of an applicant’s details they can then take a number of steps, all of which could cause or exacerbate mental health issues. These issues are:
- Lenders pursuing borrowers by text and email regarding missed payments
- Lenders sending messages encouraging existing borrowers to take out additional credit
- Lenders contacting consumers who enquired about a loan but then did not complete an application, and then inappropriately encouraging them to restart their application
In addition to the central recommendation regarding possible restrictions on the times of day when loan applications can be made, other recommendations of the study include:
- A formal recommendation to regulators and legislators to consider banning lenders from pursuing existing customers by text and email to take out more credit
- The introduction of measures to reduce the risks of applicants making hasty decisions. For example, they suggest using automatic prompts on the final application page to encourage applicants to reflect before submitting a completed application, and requiring borrowers to confirm their understanding of the amount borrowed and the total to be repaid
- A ban on lenders providing the monies within four hours of the application being made
- A scheme allowing consumers to exclude themselves from products provided by short-term lenders
Lead researcher James Ash commented:
“The shift online has increased availability of payday loans to people previously excluded by mainstream lenders.
“But our research shows that digital access to credit only offers quick fixes – it doesn’t address borrowing’s root cause.
“Twenty-four-hour access to credit from any device is leading to unsustainable borrowing. This can contribute to long-term personal and financial hardship, and mental health problems.”
In a 24-hour society where most people have access to the internet, and where many lenders operate automated assessment models that don’t require an employee to be in the office to manually review an application, it is perhaps not surprising that many loans are taken out in the small hours.
Any ban could also unfairly disadvantage those who work irregular hours, as for shift workers and the like 11pm to 7am may not be an inappropriate time to be making decisions about whether to take out a loan.
However, all lenders do of course need to make sure they carry out rigorous credit and affordability checks on all applicants, regardless of the time of day in which the application was made.
This study primarily looked at payday loans, but the issues raised are certainly relevant to all types of lender.
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