Ever since payday loans appeared on the scene, they have been the target of negative media attention. Payday loans also called “short-term loans” have come under a lot of public scrutiny for their apparent predatory lending approach.
All the negative publicity led to many changes in the industry to clamp down on bad practice and bad actors in the industry. Let’s go through all of the main talking points regarding payday loans.
Payday loans trap borrowers in a circle of debt
Payday loans like any product requires a market to succeed. There was a demand in the UK for a service to allow people to borrow small amounts of money for very short periods of time until their next payday. Banks where not interested in providing loans for a few hundred pounds, so a new industry was born. In the early days payday firms could charge their customers whatever interest rate they wanted to along with very high rollover fees.
Remember that a payday loan is normally repaid on the borrowers next payday. If the borrower did not repay the loan in full on their next payday then the payday firm would roll the loan over into the next month and charge an administration fee.
Each month an administration fee was charged and borrower believed that this fee was actually the loan being paid down until they checked their account statement to find that the principle loan plus interest was still owed and the amount had increased due to the very high rate of interest.
Now borrowers found themselves having to borrow more money to pay down the larger outstanding loan. This caused borrowers into a circle of debt.
In 2014 the Financial Conduct Authority stepped into the industry to place caps on the level of interest that payday lenders could charge. Today payday lenders cannot charge more than 0.8% per day interest on the principle.
Also, borrowers will never need to repay more than double their original loan amount. For example, when someone takes out a £100 loan, they will never repay more than £200 including interest and fees.
These caps have made payday loans a safer method to take out finance with lower risk of going into uncontrolled debt.
Payday loans are intended to help people with short term financial problems that need resolving today. Payday loans are never to be used for long term borrowing.
Payday lenders are all loan sharks
All reputable payday lenders are authorised and regulated by Financial Conduct Authority. This means that these firms are heavily regulated as to how they market their services, their interest rates, fees. They are also under the obligation to act in the interest of the consumer with policies related to treating customers fairly with an emphasis on identifying vulnerable borrowers.
All lenders perform credit checks on every payday loan application to ensure that a borrower can afford the loan. The FCA also determines how consumers can be contacted with the onus on the lender to be sympatric to the borrower if they are finding it difficult to repay the loan and work with the borrower to restructure the loan to make it easier to repay.
Payday lender target vulnerable borrowers
Payday lenders like any business are in business to make money. Just like McDonalds, Nike, Apple or the local corner shop. It is not in the interest of a payday lender to offer loans to people who are not able to repay. It would not make any sense to lend money to someone who had no means of income or no job. Any payday lender lending money to people who were not able to repay the loans would go out of business quickly.
Before a loan is granted a lender will always perform a credit check and affordability check to make sure that:
- The borrower can afford to repay the loan.
- The borrower has a history of being financially responsible.
Payday loans are not offered to anyone under the age of 18 or to anyone who cannot prove an income that is able to repay the loan.
Payday loans have lots of hidden fees.
This is not at all correct. The last thing that a lender wants is to acquire a reputation of acting fast and loose with their customers. Once word gets around on the internet that a lender is trapping people with hidden fees then that lender will soon find customers going elsewhere.
Along with all the recent increase in retrospective claims being made against payday firms they are naturally going to be very transparent regarding communication with their customers.
When a lender sends a borrower a loan offer all the fees, charges, interest rates and total amount payable will be clearly stated on the loan offer. The onus is on the borrower to perform their own due diligence and read the loan offer. Borrowers are encouraged to speak to the lender if they are in any doubt regarding any part of the loan offer. The FCA has imposed strict rules which state that all communications with the customer are clear and in plain English as to avoid any misunderstanding or confusion.
All Payday Firms are FCA Regulated
If you want the best payday loans then you need to ensure that the firm you are working with is authorised and Regulated by the Financial Conduct Authority. In 2014 the FCA took control of overseeing the financial industry and changed the rules so that it placed all payday lenders under strict rules. Before you take out any form of credit you will want to check the FCA register to see if your firm is authorised. If they are not registered with the FCA you may be dealing with an unethical firm who may steal your details. With registered FCA firms you have the peace of mind knowing that they are following best practices.
Unethical Brokers Are No More
A broker is a firm which finds the best direct lender to suit your loan requirements. In the past there were brokers who would steer consumers towards the lender that paid them the most commission regardless whether that lender was the most suitable one for the borrower.
Today brokers must demonstrate impartially towards lenders this led to many brokers going out of business since they function only when they received the higher commissions. The authorised brokers which remain today are under more scrutiny than before the changes to the payday industry in 2014.
In May 2018 the European Union passed a new law called General Data Protection Regulation or simply GDPR. These new rules handed consumers more power and control on how firms handle their personal data. This has had a massive effect on payday loans in the UK.
When anyone applies for a payday loan, they need to provide quite a bit of information regarding themselves, such as name, address, bank details etc. Now Payday firms must ensure and prove that this data is held safely and secured correctly.
Check the lenders website before applying
Before you accept a loan offer from the lender it is a good idea to check the lenders reputation on review sites and see what other have said. If the reviews are positive, then that is a good sign the lender is responsible and is customer focused.
Check that their website is secured using the latest security certificates. You can see this certificate in the URL field where you type in the web address shown as a padlock icon. The url ought to start with https:// and not with http://.
Check that the lender is also registered with the FCA. There are some firms that pretend to be legitimate firms by cloning their details.