Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
The whole payday industry has changed since it came to the fore over a decade ago. People say that more change is required from the industry, the question is does it really need to change any more and if so, what really needs to change.
I was speaking to someone the other day and they asked me what I did for a living, I mentioned that I worked with payday lenders. Instantly they said, “That’s a rip-off, init?”. I have had this reaction more times than I can possibly count.
Normally the comment of “rip-off” is then generally quickly followed by, “It’s a con” and “don’t people have to pay back thousands of pounds?”, I’ve even been called a “vampire” are few times.
This is not at all surprising considering all the bad press that payday loans have received in the past few years. Although calling payday loans a rip-off or a con is not entirely correct. Read on, it may be surprising to you to know the truth about payday loans.
Why do people take out payday loans? The straightforward answer is that they need to pay off an emergency expense which cannot wait until the next payday, hence the name. Some people have the money they need in their savings, but they chose not to use their saving since no one likes to be completely out of pocket.
Payday loans are regulated by The Financial Conduct Authority and as such they are heavily regulated, this means that payday lenders cannot charge the perceived multiple 1,000’s of percent per month for the loans. Also there is a misconception about the types of people who take out payday loans, on average the main applicant is not the unemployed but young people with jobs that have done their sums and have decided that a payday loan is more affordable that say an overdraft.
If people were to take the time to compare payday loans against overdrafts, they may be surprised to find that unauthorised overdrafts are more expensive than a payday loan.
The main issue which payday lenders faced at the start was that the lenders were not entirely transparent about the product they were selling. The payday loans came with very high late payment fees and additional charges. The loans themselves were not the problem. If the loans were paid off when they were due, they served the purpose they were designed for. The problem was with the lenders and not the actual product itself.
Lenders had a duty of care to explain to the borrower all the fees, charges and interest rates and not bury all the detail in the fine print and then when the borrower experiences problems with repayment the lenders did not do themselves any favours by aggressively going after the borrowers. This is the real reason that payday loans have such bad publicity, the product itself is very useful when it is explained, understood and used correctly.
How did Payday Lending Go Bad?
It is untrue to say that payday lenders were cowboys and that they were allowed to run riot across the land emptying the pockets of anyone they came across. This is simply not the case.
Any company which wants to get into financial products in the U.K must seek authorisation from The Financial Conduct Authority which were preceded by the Office of Fair Trading, who did not pay as close attention to what payday lenders were doing as much as FCA do today.
Under the OFT, payday lenders had a field day, they could charge whatever they wanted to charge interest, fees and roll over charges which caused many people to get into huge amounts of debt when they failed to settle the loan at the end of the month when they were next paid.
The term payday loans were because these loans were for very short periods of time, generally until the next payday or within 30 days. If the loan was not paid off in the agreed time period, then the loan was rolled over into the next month and the borrower was charged a fee to roll the loan over.
When the FCA took over they shook the industry up and laid down the ground rules as to how fees were to be structured. No more sky-high interest fees, no more unlimited fees and a ceiling on the maximum that a borrower would pay over the lifetime of the loan.
These changes saw some very big players crash out of the market, Wonga being the most notable example. The payday lenders which survived or have come into the industry since have to now follow very strict rules.
Margins believe or not are very tight for payday lenders. For a loan of £100 over 30 days the borrower will pay £124. Consider the cost of getting the customer to the payday lender.
Then you have all the indirect costs, such as staffing, computer systems to run the loan platforms, office space. There is not much of a margin on a £100. One reason why very few lenders will accept loans for such small amounts. There simple is no margin.
So, to make the loans pay lenders may start to cut corners in other areas like, reducing staff numbers, so here customer support may suffer, or they might be a little bit more forceful when it comes to collection on late payment. So even though the FCA has indeed stepped into shake out of the payday lending tree all the bad companies. There are still those out there that claim to follow the rules, but only in spirit.
The FCA expects payday lenders to:
When taking out a loan with a direct lender it is important to check for the following:
If a payday lender wishes to stay in business, then they will have to fall into line with the FCA rules and to put the customer front and center of their business model.
The lenders we work with have developed technology which helps you to find the best possible payday loan to meet your affordability.
Payday lenders today are not the same payday lenders of years ago. They are more transparent and open about their interest rates, fees and charges. If in doubt just ask them.
Debt management agencies are regulated by The Financial Conduct Authority
Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.
https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk
You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice