Payday loans are the financial product that everyone loves to hate: they provide short-term loans to people who require immediate financial assistance, yet come at a steep cost that can put some people in worse financial straits if not paid off as quickly as possible. Lenders have made a tidy sum off of people with poor credit history and few other options, who often overlooked the fine print in their rush to bolster their bank accounts.
Some loan companies took advantage of their customers’ urgency, by charging sky-high annual interest rates and allowing borrowers to roll over their loans multiple times, compounding their financial distress and effectively leaving them indebted for far longer than necessary. These practices created a bad reputation, despite the fact that some people can benefit from short-term financing – provided they are capable of repaying the loans on time.
Government Payday Loan Regulations Enacted
Recently, the British Government created regulations to put a stop to poor business practices within the industry. The Financial Conduct Authority (FCA) began tightening the reins in April 2014, by restricting the number of allowed monthly rollovers, regulating the language used in advertisements, and improving the minimum lending criteria used. These rules were enacted to prevent the issuing of loans to customers who cannot pay them back, and to ensure that misleading language did not make them appear better than they actually are.
In January 2015, the FCA added caps on payday loans. When repaying balances, borrowers do not have to pay back more than 0.8 per cent of the initial amount borrowed daily. The overall cost of repayment has been capped to no more than twice the initial borrowed amount. This prevents lenders from charging astronomical annual interest rates, some of which were up to 6,000 per cent.
Payday Lenders Feeling the Financial Pressure
Since the new regulations went into effect, payday lenders have seen their numbers drop dramatically. The number registered with the FCA before the rules was approaching 400; only 247 lenders applied for authorisation with the FCA as recently as February 2015. The market is no longer as profitable for lenders who had to make sharp adjustments to comply with the regulations.
Even those still operating must downsize to keep their businesses profitable. In 2013, there were nearly 1,400 loan shops throughout Britain. Now, shop closures have reduced the total number to about 500 locations throughout the country. This reduction shows that the new regulations are working.
With the loss of revenue from high-rate loans, lenders have come up with new financial services to offer their customers. Pre-paid credit cards, longer-term loans, cheque-cashing services, and pawn broking services are all possibilities for lenders who previously specialized in payday loans. These new financial services give customers the benefit of choice, which will likely be a boon to both borrowers and lenders overall.
Customer Complaints Down by 45%
While the reduction in predatory lending is one good sign, the proof comes from reduced customer complaints. Since the new regulations were enacted, the number of complaints brought to Citizens Advice by customers has dropped by 45 per cent, from 10,155 complaints to just 5,554. This is promising news to supporters of the legislation, who wanted to reduce the misinformation about various lending options.
This indicates that borrowers are growing more aware of their rights, responsibilities, and options when choosing a payday lender. Previously, for example, lender advertisements had very few regulations, allowing unscrupulous lenders to promote their services with excess fanfare. This led to overly attractive ads that did not give a clear and accurate description of the services provided, and at what rates. Today, ads are not allowed to mislead customers or make promises they cannot deliver. As a result, borrowers can make informed decisions without having to decipher the advertisements’ meanings.
The future of payday loans is looking bright for hopeful borrowers who need immediate financial help without fear of being stuck in a constant repayment cycle. After some adjustment, remaining lenders will eventually benefit as well, by being prompted to expand their available financial services. Once the industry becomes accustomed to the new rules, borrowers and lenders will have a better working relationship.