Are Payday Loans Dead?
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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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Pay Day Loans have gained popularity over the recent years and it has been found over time, that these pay day loans, for some borrowers, are now becoming more of a menace rather than a blessing. These loans were thought to be a blessing in disguise but have turned out to be more devastating in their outcome rather than contributing to financial stability in economies like UK and USA. In the UK new regulations from a new regulator have been introduced to dramatically clean up the industry, but is it possible to do this without killing the payday loan?
The regulators, both in the UK and USA have caught on to their unfair practices and have introduced a set of measures to curb such practices in these particularly large economies. The reason why UK and the USA have been targeted is because USA is where this industry has originated from and some of the top companies in the UK are controlled by US organizations. This industry has grown exponentially in the UK because of lenient regulations by previous regulators, this has historically led to no cap on the interest rates and the dreaded “APR” these agencies are charging.
When the Financial Conduct Authority (FCA) took over regulation in April 2014, many people thought that this would signify the end of the payday loans market. The fear was whether lenders could still be profitable while abiding with what was bound to be tougher, more restrictive rules.
My view is that, having now gone through several new regulations that there will still be a profitable place in the market for payday lenders. The rules in fact will help those reputable ones to be more profitable.
I want to take just a couple of the rules that 'scared' lenders at first and show how they have actually helped.
Restricting CPA attempts.
At first this was an OMG moment, 2 CPA attempts then STOP. With lenders making upto 30 attempts per month to 'raid' peoples bank accounts, surely restricting this to 2 would lose significant revenues. Well no, firstly this has promoted more responsible lending. If you cannot use this tool to forcefully get the money back then you must be more care to lend to those who will pay it back as agreed. Secondly, it has meant that there is more likely to be funds there when you do try to use the CPA. Historically you would have some lenders trying to take their overdue repayments many many times on the customers paydate. With the restriction it is more likely that you will not have a lender who has been owed £1000's and not been able to collect for several months going in a wiping a customers account clean - thereby not leaving anything for the customers budgeted payments.
OK, so the thought of rate capping was a big concern for many lenders, would the FCA impose rules like in the USA or France or Australia where APR's are capped in double figures (Typical Payday Loans are four figures APRS). Well in fact the cap was set at 0.8% per day (24% per 30 day period). This was not much lower than some lenders were currently charging with a typical amount being around 25%. The FCA also set 2 other caps. One affected default fees and the other affected the total cost of the loan. While these would have effects on lenders, the normally only came in to play when customers fell into arrears. In these circumstance such charges as were previously charged and customer forbearance would not go hand in hand. To begin with many default charges were never recovered any way as the customer was in financial hardship and secondly, a struggling customer with a lower balance is likely to set up a plan to repay it as they can see that there is an endpoint. If you end up presenting a customer who borrowed £200 with a balance of £1500 then they will often just give up.
As I hope can be seen from these 2 short examples, I think that while the FCA regulation will cause a significant change in the Payday industry, I think for many it will be the new life and not the death. Of course those that do not want to adhere to the rules may disagree!