With loans of up to £500 and interest payments of around £25 for every £100 an applicant borrows, payday loans exploded in popularity in the UK between 2005 and 2014. It is thought that the number of people taking out payday loans increased four times between their first appearance on the financial landscape and 2010. At their peak in 2012/13, as many as 1.9 million people held payday loans in the UK, with each one taking out an average of six per year and an average size of almost £300.
But with the growth in payday loans came a growth in reporting of problems for people struggling to meet their repayments. The media focused heavily on payday loan interest rates, the practice of ‘rolling over’ a loan repayment from one month to the next and supposed sharp practices by lenders.
In 2013, the Financial Conduct Authority published proposed new regulations covering payday lenders. Those new rules came into force in January 2015. They are designed to protect borrowers from some of the worst aspects of payday loans whilst still allowing the market to continue to operate in an albeit regulated form.
Borrowing costs fall
As a result of the FCA’s new rules, it is thought that more than one million people saw their borrowing costs fall. Price caps on interest rates and fees charged mean that the costs of most new payday loans have fallen dramatically. Under the FCA’s rules, a lender is now allowed to charge a maximum of 0.8% interest per day on the amount borrowed. In cases where borrowers cannot or will no repay their loans on the date agreed, the lender is only able to charge a default fee of no more than £15.
Other aspects of the FCA’s rules govern the total costs that a lender is allowed to levy on borrowers. From January 2015, the total cost of repaying a payday loan was capped at 100% of the original amount lent – meaning that even in extreme circumstances and when all other efforts to resolve a situation have failed, a borrower will only ever be liable to repay twice what they borrowed originally.
The new rules have led to a dramatic fall in the cost of payday loans – particularly for borrowers who are desperate for short-term money but are able to repay the loan in full when the repayment date comes round. It means that somebody taking out a loan for £200 for 30 days and who then repays it in full on time, will not have to pay more than £48 in fees and charges.
At the time that the new rules came into force, Martin Wheatley, the chief executive of the FCA, said that the new limits on how much payday lenders could charge would make the costs of borrowing cheaper for most applicants. He added: “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control – no consumer will ever owe more than double the original loan amount.”
While payday lending has been subjected to fierce media scrutiny, the market is much like other parts of the credit sector: there are a large number of companies offering payday loans with some charging high amounts and some charging lower fees and interest rates.
The new FCA rules have, in effect, levelled the playing field, making it possible for the more responsible lenders to compete with those who had previously been charging very high interest rates. That is good news for the consumer – particularly the hundreds of thousands of users of payday loans who behave responsibly and have always made their repayments on time.
And for those who are already struggling to make mortgage, rent or other regular payments, the FCA’s new rules mean that payday lenders can no longer simply withdraw money from their bank account without the individual’s written consent. The lenders are also now only allowed to take the full amount of the repayment due – not part payment if the full amount is not available – meaning that borrowers who are already in financial difficulty should still be able to meet their other regular outgoings.
Lower charges and more transparency
The playing field has been levelled further with regulations about how payday loan companies operate and communicated with their customers. From January 2015, lenders and brokers must include their legally registered company names – not simply their trading names – in all of their advertising and marketing material. They are also compelled to clearly state in their literature whether they are a broker or a lender.
Taken in their entirety, the new rules have levelled the playing field for payday loan borrowers, making charges more transparent, repayments more affordable and bringing transparency to what was once a confusing sector. Shortly before the new rules came into effect, the FCA published research which suggested that 70,000 people who would have been able to take out a payday loan under the previous rules, would no longer be able to do so under the new regime. This amounted, the FCA said, to about 7% of all of the people who held payday loans during 2014.
While the new rules have restricted the number of loans issued, recent evidence suggests that large numbers of borrowers are still using them. Indeed, the FCA itself says that its research suggests that the rules have resulted in only a very few people seeking loans from unregulated loan sharks instead of payday loan companies.
Article provided by Solution Loans, a technology-led finance broker with a broad range of finance products and many years experience in advising clients of the most suitable type of credit for their requirements.