The payday loan industry has gone through several regulations over recent years after it’s fallen under scrutiny. To understand the rules put into place, we first need to understand the problems they were fixing.
What is a payday loan, and why have they been criticised in the past?
Like all short term loans, payday loans were initially created to help ease the financial pressure of people. Particularly the financial pressures individuals face before getting their monthly pay cheques at the end of the month. Payday loans are paid directly into your bank account, and then once the recipient receives their monthly pay, they are paid in full with interest added on top. However, the main problem with payday loans is that they are straightforward to attain, making it too easy for financially vulnerable individuals to over-borrow. Consequently, this can lead to a lot of people suffering financial hardship. Another reason payday loans have come under scrutiny is because of the high-interest rates. This means the amount a person borrows is significantly different from the amount they must payback.
Consequently, new laws have been introduced which attempt to regulate payday loans for the safety of future borrowers.
What improvements have been made in the payday loan industry?
The Financial Conduct Authority (FCS) was responsible for regulating the payday loan industry.
The first action by FCS was introducing a cap on the interest rates charged on payday loans. They had them capped at 0.8% per day the amount borrowed. Due to problems associated with extensive interest rates, the FCS the cap with another rule stating no borrower should pay back more than twice the amount of their original loan.
Another way the FCS has regulated payday loans is by reducing the admin fees payday lenders can charge for organising loans in the first place. Plus, they have capped penalty fees which can be charged when a borrower fails to meet the conditions of their loan.
Furthermore, the FCA has also made it mandatory for payday lenders to list their loan rates on at least one price comparison site to prove their legitimacy. This has also helped improve the competition and price transparency in the payday loan industry.
Since these regulations have been in place, reports by Citizens Advice have found that borrowers are less likely to find themselves in financial difficulty, permitting they can communicate their challenges with their lenders.
This observation has made room for further suggestions on how the payday loan industry can be improved. It suggests that lenders can provide alternative payment plans if borrowers can articulate their challenges. Therefore, further improvements can be made, such as making the line of communication between the lender and borrower better.
In conclusion, many of the regulations on the payday loan industry have improved it in more ways than one. However, there is still a lot more that can be done to improve the industry for lenders and borrowers.