23rd July 2015
The often spiralling costs of payday loans have been widely reported on since they first became available. Hidden and unclear terms and hefty late fees have led to numerous cases of snowballing debts.
Payday loans, which originated in the United States, became popular in the UK in 2009 after the financial crisis had begun. The demand quadrupled in comparison to the previous years and as a result, the number of payday loan lenders also increased.
Despite the rise in demand for short-term loans, the number of companies offering loans within the market fell sharply in the last 2 years. From nearly 250 firms operating in 2013 only 30 to 40 remain in 2015; this is largely due to the government’s clampdown on payday loan lenders.
There has been a call for tighter regulation for payday loan lenders for a number of years and finally, in January 2015, the Financial Conduct Authority imposed caps on how much lenders can charge.
The caps were set at a maximum of 0.8% of the borrowed amount for each day in the loan period. In addition to the cap, a limit of £15 was put into place on default fees. So, if there is a failure to make a repayment the fine is limited to this £15. A number of additional regulations were also put into force which limited repayments to twice the originally borrowed amount and state that lenders can not try to reclaim debts from a borrower more than twice.
Additionally, borrowers are now more strictly assessed which the trade body reports has led to around 80% of loan applications being rejected by lenders. The fear is that these rejected borrowers are turning to dangerous alternatives such as illegal loan sharks; the Consumer Finance Association claims that 4% of these borrowers are turning to illegal loan lenders. Borrowers should be aware of the risks of using loan sharks. Loan sharks are known to charge extortionate rates and often use extreme methods to reclaim their debts. Borrowers are advised to explore their options and keep in mind that payday loans are not designed to be a long-term solution to financial difficulty. There are still plenty of short-term loan lenders besides the big names in the market so be sure to compare different borrowing options before making a potentially costly decision.