Payday Short Term Loans That Make Sense
Payday Loans were created to ease the financial pressure that workers face before they receive their pay cheques at the end of the month. The short term loan would be paid directly into the worker’s bank account before they were expected to repay in full, with interest, when they eventually received their pay. The type of loan came under much scrutiny, with critics citing that it made it too easy for a vulnerable person to ‘over borrow’ and therefore, face long term financial hardship. It was as a result of this condemnation, that a series of laws were introduced in an attempt to regulate payday loans.
We’re going to explore those very laws and examine whether the regulation made a difference.
Which Regulation Was Introduced?
The Financial Conduct Authority (FCA) was the organisation responsible for the regulation introduced into the payday loan market.
The first action the FCA took was to introduce a cap on interest rates charged on loans, which were frozen at 0.8% per day the amount borrowed. There was also another condition added, that no borrower should have to pay back more than twice the amount of their original loan.
They also regulated and reduced the fees that payday lenders could charge for arranging a loan, as well as introducing a cap on the borrower default fee, meaning that if a borrower failed to meet the conditions of their loan, they could only be charged a maximum of £15.
The FCA’s final ruling was that each payday lender had to list their loan rates on at least one price comparison site to prove their legitimacy, as well as improving competition and price transparency within the market.
Did The Regulation Make A Difference?
These interventions went a long way to making the payday lender industry far more legitimate; however there is still room for improvement which was detailed in a report published by Citizens Advice.
They found that after the caps and regulation were introduced, that borrowers were far less likely to find themselves in extreme financial difficulty, provided that they communicate to their borrowers that they were having trouble repaying their payday loan.
The 44% of borrowers who were experiencing difficulty in paying back their loans, but actually spoke to their lender, managed to agree a more affordable alternative repayment plan.
This statistic illustrates two points; the first is that lenders are more than happy to provide alternative options for borrowers provided that they tell them they are experiencing problems. The second, however, is that more than half of borrowers are unwilling to voice their concerns regarding repayments, due to the fact they perhaps feel embarrassed or ashamed at their inability to repay their loan.
Therefore, while payday lenders have clearly improved their methods for making loans easier to repay, work can still to be done in regards to the line of communication between lender and borrower.
Ultimately, it’s clear that the payday loan industry has evidently improved after regulation, however it’s still not perfect, and things can still be done to better the industry for both lenders and borrowers.
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