The payday loan industry is one which has received much stigma in the media since their introduction to the financial market five years ago. Originating in the US, these short-term loans have been repeatedly criticized for their heightened interest rates and charges. Nevertheless for companies in the sector such as Wonga, Payday UK and PiggyBank the negative press does not seem to have had too much of an effect, as business has been rapidly growing and consistently on the rise since they were established.
However, all that may be about to change as the Financial Conduct Authority (FCA) announces new regulations which are estimated to put over half of payday and short-term loan companies out of business. In April 2014, the FCA took over 50,000 consumer credit firms and has already deemed many of the recovery processes that make these lenders so profitable, incompliant. As of January 2015, the FCA has proposed that for new and rolled over loans there is to be limit on the amount of money that lenders can charge. This limit must not surpass 0.8% of the original amount borrowed, lowering the costs for consumers paying a daily interest rate which may currently be above the initial cost cap. This also means that pricing and interest is more proportionate to the amount borrowed; therefore customers are only subjected to higher rates if they borrow more money.
Secondly, a £15 cap on default fees is to be introduced. Some payday loan lenders were previously charging in excess of £30 for such fee, so this reduction is being implemented as a way of protecting borrowers who may already be struggling to meet their agreed repayments. It is however important to recognize that removing this charge altogether may have an adverse effect, as it eradicates the need for consumers to pay back on time. By lowering it, lenders are not being rewarded for unsustainability, meaning pre loan credit and affordability checks will be more rigorous and responsible.
Although these changes appear to be positive for borrowers, with so many lenders proposed to be out of the market, it may encourage the use of loan sharks due to decreased short-term loan availability. Many charities have expressed concern for customers that may not have access to these loans as of next year, predicting people will be driven to using other less virtuous lenders and an increase in logbook loan applications.
It has been a long time coming. Apparently the FCA state that there are only going to be 5 UK lenders left in the market by the time all of the new regulations have kicked in.