The payday loans review for the year is changing and evolving.
As 2016 draws to a close, we review the UK short term loan market and everything that has happened this year.
This 2016 payday loan market review covers the industry’s biggest changes. These changes include a major Google ruling that has changed the landscape for borrowers. 2016 has also been a year for new loan products, with big developments to follow next year.
Google payday loan ruling
In 2016, Google introduced a ruling that significantly changed the industry.
Payday loan advertising became affected by this ruling, in the UK and overseas.
What the Google ruling has changed
For the first time, Google announced a total ban for an already regulated product.
Payday loan lenders can no longer pay to advertise their short term loans with Google.
The ban, introduced on July 13th, affects credit institutions in the UK. These are loans with repayment terms up to 60 days.
The changes are being slowly rolled out, so may not reflect in your Google searches at the end of 2016.
Loan providers can still feature in organic results, which they do not directly pay for.
Lenders can continue to advertise any loans with repayment terms of 61 days or more.
How the Google payday loan ruling has affected the industry
Before the Google ruling, any lender had the option to pay for Google advertising.
Their website would appear when consumers searched for payday loans.
Now, this option is not available. All lenders can still appear in search results, within the organic listings.
Google aims to put the most relevant and valuable websites in the top positions. Often, these are the websites that are frequently updated with interesting content. Many of the most prominent Google search results are companies that people search for by name. These are often the lenders that people first consider.
For payday loan searches, top results include QuickQuid, Wonga, Peachy and Pounds to Pocket. These lenders are ones that you are likely to have already heard of. Smaller companies struggle to compete with larger ones. They cannot build the same level of authority. More so they are not already well-known. They also do not have the budget, or time, for regular website updates.
Google’s payday loan ruling should protect consumers. It may have the opposite effect.
Consumers will find the biggest lenders. They may not find details about the smaller and newer lenders. Frequently, the smaller lenders can offer a more suitable loan.
Critics of Google’s announcement have stated the demand for payday loans will not decrease. Instead, Google may just be limiting a market. Google may be restricting the choice that consumers before had access to.
Payday loan comparison websites
Payday loan comparison websites have become more important than ever, in the wake of the Google ruling.
A comparison site could be the only way to find the best payday loan deals.
Comparison sites consider the newest and smallest lenders. Their loans show alongside those offered by the most well-known loan providers. This means that borrowers can choose based on merit, not advertising budget. Unless consumers wish to see only the biggest lenders, they should consider visiting a comparison website.
Comparison websites give consumers the chance to explore the market in full.
A wider variety of payday loans
Lenders have increased the range of payday loans that they offer.
FCA regulations have meant that loan prices do not vary as much as they once did. Lenders must compete in other areas. Many are aiming to provide the best customer experience, or an innovative product. This is a positive move from a consumer’s perspective. This is a positive result from a consumer’s perspective.
New technologies can also improve affordability assessments. Fewer people will find themselves struggling with debt. Financial situations are more closely monitored. Borrowers can now access loans linked to their bank accounts. This technology is becoming increasingly popular. There are also other developments that are changing the way consumers borrow money.
Medium term loan products
Many lenders are also creating a broader range of medium term products.
These are often larger loan values and provided over a slightly longer term, usually 6 – 12 months.
Unlike traditional loans, these are not loans that will be with you for years. Yet, they are more flexible than traditional payday loans.
Consumers can borrow a larger amount of money, over a longer repayment term. These loans are suitable for bigger emergencies and can still be manageable.
Borrowers get the option to repay their loan early, if they have the money available. This could reduce the total amount of interest that they need to pay.
For instance, Sunny now offers Sunny Plus. Loans are for anything from £1,000 to £2,500.
Pounds to Pocket offers what it describes as a ’12 month payday loan alternative’. In this case, you can borrow up to £2,000.
Revolving credit options
Revolving credit blurs the line between a loan and a credit card. This can make revolving credit convenient for repeated borrowing.
It is sometimes suggested that you do not rely on payday loans from month to month. Sometimes, you may find that you need an extra financial buffer.
If you are living within your means, but with occasional extra expenditure, revolving credit may be right for you. You will need to be confident that you can make repayments.
SafetyNet Credit is one of the better-known providers of this type of loan.
Lenders that offer revolving credit will typically provide you with a credit limit. You can borrow up to this limit.
Usually you are able to repay your debt, then borrow again without re-applying.
You borrow money in the same way that you might use a credit card. Yet, the cash arrives in your bank account where it can easily cover Direct Debits.
Some lenders will link your loan account to your bank account. They can automatically transfer money to keep you out of your overdraft.
These types of loans are becoming more popular.
Drafty launched in mid-2016, and their loans are for values up to £3,000. You become approved for a credit limit, then choose how much to borrow. With Drafty there are small monthly repayments, but you can choose to pay more than the least.
There are usually no extra credit checks if you want to borrow more money later. Yet, your account will need to be in good standing.
If you have missed previous repayment deadlines, then you may not be able to receive any extra funds. You will need to have money available within your credit limit, also.
Ongoing stringent regulation of payday lenders
The Financial Conduct Authority regulates the payday loan industry. The regulator started in 2013, to take over from the Office of Fair Trading.
Industry regulations are now tighter.
In recent years, hundreds of lenders have been accused of being irresponsible. Some had been acting unfairly. Some lenders were chasing debts aggressively.
Lenders that overcharged, or did not carry out reasonable affordability checks, need to make amends.
In 2016, we have seen the ongoing impact of tighter payday loan regulations.
Cash Genie went into liquidation in January 2016, following a £20 million compensation bill. This followed an investigation by the FCA. 92,000 customers were due to receive compensation from the lender.
CFO Lending is the latest lender found to have treated its customers unfairly. More than 97,000 customers can expect financial compensation. Again, this is the result of the FCA’s investigation.
The FCA has stated that £31.9 million of debt will be written off. A further £2.9 million will go on cash compensation.
Reviews by the FCA can take years to finalise. In this case, a lengthy investigation started in 2014. It was complete in February 2016.
Many FCA investigations will now be ending.
It is likely that most customers will receive compensation by 2017 at the latest.
Authorisation and the Financial Services Register
As of March 2016, roughly 20% of lenders were working on interim permissions. They continued to trade whilst awaiting a final decision.
42% of the lenders that were operating before the FCA’s creation had been approved by the new regulator.
The remaining lenders had left the payday loan market. Some had let their interim permission lapse without applying for full authorisation. Other lenders had not received approval to continue.
Consumers today can be re-assured by the Financial Services Register.
Lenders and brokers that feature on this register have been authorised by the FCA.
A change in media and regulator focus
Before the FCA introduced price caps and regulations, the payday loan industry was the subject of controversy.
Media outlets reported about many customers offered loans that they could not afford.
The negative reputation of payday loans is one that has endured.
Slowly, through 2016, the media focus has changed.
As 2016 ends, there is an emphasis on the comparison of payday loans and overdrafts.
Many unauthorised overdrafts, and some authorised overdrafts, have high fees and charges. Often, these make them more expensive than payday loans.
Currently, overdrafts can also continue to mount fees and charges continuously.
The FCA has almost finished bringing payday lenders under control. It has been suggested that overdrafts are to be the next focus.
In July, the Chief Executive of the FCA announced that he would be paying attention to overdrafts.
The Competition and Markets Authority has already used its powers. The CMA requires that banks set their own maximum monthly overdraft charges. But, no specific limits were issued. For now, this leaves banks able to set relatively high maximums.
The FCA can limit overdraft charges. It may take things further than the Competitions and Markets Authority has chosen to. A thorough investigation is likely to happen over the next few years.
Payday loans are often cheaper than overdraft borrowing.
Changes we can expect in the future
Lenders that did not follow FCA regulations have now left the market.
Over the coming months, we can expect the last non-compliant lenders to pay compensation to their customers.
The FCA is finishing its investigations. It is providing final authorisation for remaining lenders.
Lenders returning to growth
Wonga reported losses of £80.2 million in 2015. Growth was expected through 2016. Wonga’s chief executive has stated that they expect to “return to profit” in 2017.
Following a few turbulent years, we can expect 2017 to be a year when lenders get back on track. They have had time to adapt to changes implemented by the regulator.
Lenders may introduce new loan offerings. We can expect that an increasing number will offer medium term loans, with the option to repay early. This will give borrowers a wider range of options.
New loan types may help to improve the reputations of payday loans. Certain products may help lenders to navigate Google’s new advertising rules.
The lending market will feel more settled, with a more regulated industry being standard.
Price comparison site regulation
In late 2015, the Competition and Markets Authority published a final order. It required all lenders to publish details of their loans on at least one comparison website. This move emphasises the importance of comparing loan prices.
Comparison sites can help to create a fairer and more competitive market.
The FCA is introducing further rules for price comparison websites. These rules come into effect from 1st December 2016. They will make these websites more transparent.
The FCA’s new rules will ensure that:
- price comparison websites sort lists of loans by total amount payable, in ascending order. Results can be re-ordered by the customer.
- and price comparison websites allow users to specify their desired loan amounts and terms.
- price comparison websites should not give extra prominence to lenders that pay higher commission.
- plus price comparison websites must name all lenders included within the broker’s portfolio.
The FCA has emphasised the importance of price comparison websites for payday loans. These allow consumers to view a range of loan products. Borrowers can make an informed choice about the most suitable borrowing option.
The extra regulations will ensure that customers receive useful information.
There have been several significant changes in the payday loan industry, through 2016.
One of the most notable changes was the introduction of Google’s payday loan ruling. This is slowly rolling out.
Products with loan terms of 60 days or less will not be allowed to adverstise on Google.
A change on this scale can have a big impact. It will likely mean that the biggest lenders get bigger. Smaller and newer loan providers will be harder to find.
Loan comparison websites will be more important than ever.
Lenders are expected to offer an increasing range of medium term loans in 2017.
The FCA has emphasised the need for high quality payday loan comparison services. These should not give extra prominence to the lenders that pay higher commission.
New rules for brokers will come into play in December.
Search results must first appear by total repayment amount. Brokers must also list all the lenders that they work with.
The FCA’s stringent regulation has continued to affect lenders through 2016. Some had to to compensate their debtors and past customers. Many lenders chose to stop trading, or have not received full authorisation.
In 2017, we expect that remaining lenders will be more settled. Some, like Wonga, are predicting a return to profitability. Loan providers have now comfortably adapted to the FCA’s new regulations.
This more settled landscape means that providers can focus on new products. They will install new technologies and work on improving the customer experience.
We are likely to see a wider range of loans, as lenders seek to compete on something other than price.
Medium term loans may become more popular, providing more flexibility for borrowers. Revolving credit may also increase in popularity. This provides credit card convenience merged with the benefits of small loans.
The payday loan industry has struggled with a reputation that has taken time to improve. Now, tight regulations have made consumers more confident.
Attention is instead moving to overdrafts. Many can be more expensive than short term loans.
The next step for regulators is to use the success of payday loan regulation as a framework for changes elsewhere.