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Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
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Author: External 3rd Party
A vast number of people in our country took payday loans to meet emergency expenses. According to recent estimates a total of 1.8 million people took payday loans in the last year where the average loan was £260 per borrower. Through their high interest rates and high penalties they forced a huge percentage of our population to live in constant anxiety and distress. Historically many lenders, like the famed Wonga, charged interest rates exceeding 5,000% APR on these payday loans. At no point in our country’s history such heavy interest rates were seen.
In addition to the already atrocious rates and charges there was a growth of the middlemen whose business was to ensure their customers found a way to get these payday loans. These, often fee charging, payday loan broker asked the bank details of the customers to make a request for payday loans on their behalf and in the end charged them with high finder fees of £50 to £75 for a loan of £100. Not only this but also a huge number of complaints were received where the customers did not get a loan and still their bank accounts were charged with heavy fees. To make matters worse many brokers divulged these details to other brokers who then charged the same account till it went to zero. This scam perpetrated by the payday loan brokers was of epic proportion and led to tens of thousands of customers getting swindled.
FCA brought much needed respite for the borrowers by first putting a ceiling limit on the interest and penalties charged on the payday loans. The new regulations on payday strike at three main areas:
* Interest rate: The interest rates charged on payday loans cannot exceed 0.8% per day. This brings down the overall APR and limits the ability of payday lenders to overcharge their borrowers.
* Default charges: The default charges on a single loan cannot exceed £15.
* Total repayment: The final repayable amount should not exceed twice the principal taken. Or in other words the net interest and other charges cannot exceed the amount of loan taken. This is the biggest advantage of these regulations. Many borrowers who could not pay the loans on the requisite date ended up ratcheting up huge default charges which would take the repayable amount to astronomical size. This regulation intends to limit the final amount due.
The payday loan brokers would also need to advertise their rates and charges clearly. There is also a cancellation policy of 14 days where the borrowers can cancel their contracts with their brokers. In addition to this, any fee charging broker had to present their customer with a specifically formatted communication and get their consent to it before making a charge. In an election year the voice of the general public are heard more clearly. These regulations have been due to the vocal objections by civil society, media and the general public. The biggest setback from these regulations would be to Payday Loan Brokers. Such a regulation was inevitable given the huge number of people affected by payday loans and the increasing pressure on the government to rein this sector of the financial markets. The avarice of these payday lenders and their brokers can be gauged by some of the stories brought forth by their borrowers. In one instance a borrower who wanted £100 loan claimed they ended up paying over £700 to different brokers in the name of ‘finder fees’.
The overall customer base is quite massive and if they are pushed towards financial distress the final burden would fall on the taxpayers. Government would have to divert precious resources towards supporting these borrowers which is an indirect way of putting money in the wallet of the payday industry. By giving proactive regulations for the payday industry FCA has provided good cover to the borrowers.
Even after the regulations on payday lenders and brokers there is a major disadvantage for borrowers of the "single instalment payday loans". This is rooted in how these loans are structured. When the payday loans were available in the mass market their strongest point touted to prospective customers was their ease of processing and repayment. A borrower can take a loan from £100 to £500 which is generally processed within few minutes and this amount along with the interest and charges can be paid back at the next payday.
This seemed like a great product especially for people who would like to have some buffer or who need some emergency help. However if a loan of this amount is taken then it would indicate that there aren’t sufficient savings to meet the unforeseen expenses. At the same time this loan would need to be paid back at the next payday which would upset the budget of the next month. Hence this loan merely pushes problem to the next month instead of methodically solving it.
We can see the actual workings and its effect by taking a small example. Taking a £200 loan for 30 days would require a payback of £248 which includes interest and processing charges. If an individual or a household is unable to meet £200 expense in a given month it would be quite difficult to meet an even higher expense at the next payday unless they eliminate some basic living expenses like cable, heating or travel. Even after the new regulations on payday lenders and payday brokers are put into practice this basic issue within the structuring of the payday loans will not be removed.
An alternative for these loans are short term loans. Again we can see the benefits of these loans with the help of an example. If the same £200 loan is taken from True Blue Loans for a period of 6 months then the payment can be divided over a longer period which can assure easier repayment and the ability to modify the budget to meet the payment. Admittedly the total cost may be higher as you will have the money for longer, but this is often a better solution than not being able to repay the loan at all. This gives a borrower more breathing space to look at the budget and rethink the expenses of the month. True Blue Loans is a direct lender which has made its primary goal to provide affordable loans to its borrowers and give genuine advice on how to schedule the payment.
When taking mortgage, credit cards or any other kind of debt we carefully access the affordability of the product and go for only that product which gives the best advantage. However when it comes to small short term loans borrowers end up going in diametrically opposite direction. Instead of looking at the best product they go for ease of processing or using middlemen which is like saving a few minutes of extra processing to get misery and heartache for several months. Besides the regulator’s effort, there will need to be a shift in borrower’s attitude and perception towards payday loans in order to bring a further positive change in the market. Instead of looking at these loans as a Band-aid for their immediate financial requirement, the borrowers would need to approach the loan with considerable thought and prudence.
True Blue Loans provides small short term loans for various requirements and to borrowers having different credit background. It makes sure that the borrowers get good advice on the effects of these loans and also provides flexible scheduling options for repayment of the loan. True Blue Loans offers a flexible schedule varying from 3, 5 to 6 months and makes sure that the borrowers get affordable loans which fulfill their requirement and are easy to pay back.