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Some desperate borrowers think they are doing the right thing by shopping around for the best payday loan rate. They often seek these loans as a seemingly preferred option to the late fees they face by falling behind on their bills.

According to the Competition and Markets Authority (CMA), these payday loan comparison services amount to nothing more than lead generators who are paid to sell the lead to the highest bidder. This often results in a higher rate than what the borrower believed they were signing up for.

While lead generation may be under fire, it is the fee-based loan brokers that are causing the most mayhem. Borrowers are paying a fee thinking that it entitles them to a preferred rate or an improved chance for approval. The only thing they are actually paying for is the profit to the website operator. Once they have paid the fee, the broker simply sells the person’s information to the highest bidder. Lenders charging higher rates have more room to pay higher commissions.

A simple payday loan comparison is not the target of the CMA. In fact the CMA argues that formal comparison websites need to be developed so that potential borrowers can be made more aware of the actual costs involved with such loans.

The primary problem is the use of affiliate-based loan brokers who favour some advertisers over others just because they pay more. It creates the false illusion that they are increasing transparency on rates, when actually all they are doing is steering customers away from cheaper products and towards even worse options. The visitors are usually in the dark on the entire process.

CMA is proposing that measures be taken by government to make the terms of these products easier for poorer families to understand. By increasing awareness of the costs, they argue that the average borrower is more likely to make a wiser choice.

Critics of CMA’s proposal say that an undesirable outcome could be a rise in loan sharks. By putting pressure on the entire payday loan industry and forcing some out of business, loan sharks could be the beneficiaries of higher demand for their illegal service.

Consumer advocates say that the pressure is necessary, and it is up to another sector entirely to take the demand away from loan sharks. Non-profit credit unions are largely underutilised in the UK. These financial institutions offer similar products to payday lenders, yet do so for a fraction of the cost.

What’s more than just a lower rate is the way credit unions do more for the borrower. Many products include a saving component that weans the customer off of short-term credit. It helps them become savers so that they are less likely to need emergency loan products in the future.

CMA is moving forward with the proposal to increase transparency of payday loan costs. It is yet another force that has been putting pressure on the industry. The Financial Conduct Authority (FCA) has also forced providers to cease certain behaviours that were having adverse consequences on those least able to afford such costs. Whatever the outcome, it is clear that the proliferation of payday lending is over. It is time for credit unions and banks to start filling the need with more affordable fees.