New payday loans are gracing the market just in time for the New Year.
There’s no escaping new payday loans in the news. This type of consumer finance has been making headlines for more than a year. Ever since the Financial Conduct Authority (FCA) introduced new regulations for the industry.
Since that happened we’ve seen significant changes introduced to the UK payday loans market. These have included a limit of two to the number of delay times for repayment. Also there’s now a range of capped costs.
The FCA announced a cost cap of 0.8% per day, meaning that the total of interest and fees must not exceed that amount. A cap on default fees came into play at £15 . From 2nd January, no one who’s borrowed a payday loan will have to pay back more than twice what they borrowed.
In practice this means, someone who’s taken a loan for 30 days and repaid on time will not pay more. That’s no more than £24 in fees and charges for every £100 borrowed.
New payday loans mean great changes
So, these changes have transformed the payday loans market. Before it had no caps at all and no limits on default fees and rollover. The new regulations are reported as being pretty catastrophic for many payday loans lenders.
The Financial Times described the effect of the regulations as catastrophic. It left UK lenders facing what it called a ‘wipeout’. This was on the basis of the FCA stating that 99% of the UK’s 400 payday lenders may have to shut down. Blaming the new cap on regulations introduced in 2015. As the dust is beginning to settle on the new structure of the market a different perspective is emerging. This is one that questions whether the destruction of the market as we knew it is was such a bad thing.
New payday loans mean no more rolling over
In 2013, an Office of Fair Trading report indicated that one in four payday loans were rolling over. As a result extra fees and interest accumulated each time. Many critics of the industry highlighted that some interest rates were exceeding 5000% on an annual basis.
Many people pointed out, the payday loans market had become a rather mutant version of itself because of a lack of regulation. With the new controls introduced by the FCA we’re beginning to see a more level playing field. This is a place where payday loans and short term lending products are likely to have more legitimacy and become more credible.
Stable conditions and clarity on what’s expected of lenders and their boundaries is creating a better market. Payday loans are functioning as perhaps they always should have. Those 99% of businesses may fall by the wayside as a result of these changes. But from the point of view of legitimate lenders and consumers, perhaps that’s no bad thing.