The safety of payday loans has been a well-documented topic in recent years. As recently as 2013, negative payday loan stories were in the news. Often, reports were of payday lenders accepting applications too easily.
They would give money to people that could not expect to pay back their loans. Yet, many borrowers had many loans and were struggling to meet their repayment commitments. Because, high interest rates led to mounting debt.
Consumers got placed in ‘debt spirals’ that they were unable to find a way out of. Yet, the payday loan industry developed a bad reputation. A reputation many lenders are still recovering from.
Today, payday loans are much safer. In fact, they are one of the safest forms of finance.
Safety of payday loans in 2016
The Financial Conduct Authority got created to replace the existing regulatory bodies.
In short – those that existed before had not done enough to protect consumers.
Payday lenders are now subject to strict rules and regulations. They must carry out strict affordability assessments for every loan that they offer.
Following the introduction of new regulations, all payday lenders got reviewed and assessed. Many were not given licenses to continue offering loans. Yet, others chose to stop trading as a result of stricter rules.
The lenders that remain today and are listed on the Financial Services Register. They are all authorised and approved by the Financial Conduct Authority.
Payday loans and the FCA: 2014
The Financial Conduct Authority led a focused investigation into the payday loans industry. The result of this investigation led to a complete overhaul.
The first major changes got introduced in July 2014.
When a payday loan is not repaid in time, it can get extended. Often known as a rollover, the extension can result in higher fees and interest.
In 2014, the FCA introduced restrictions so that loans could not roll over more than two times.
Continuous Payment Authority changes
Most people make loan repayments using a Continuous Payment Authority (CPA). A CPA provides a lender with ongoing permission to take money from your bank account.
The payment can get adjusted without a new agreement if your instalment amounts vary by month.
Most borrowers are keen to make payments by CPA. The process is automatic and requires no input. As long as the money is in the account on the right day, no repayment deadlines will get missed.
Before, some lenders used Continuous Payment Authority to make attempts to claim back money. For example, If a loan payment was late, they would try to take the money at regular intervals.
This often resulted in fees and charges for failed payments. As a result some borrowers got pushed further into debt.
On occasion, the CPA agreement would result in lenders claiming essential money. This included money that borrowers needed for rent, food, and bills. Any money in a borrower’s bank account could get claimed by their creditors.
Lenders are now restricted to two unsuccessful attempts to claim money. After two failed attempts, the borrower will need to reset the CPA. Until the CPA is reset, the creditor cannot take any further payments.
All lenders must now publish a risk warning on their promotions and advertisements. You will recognise these warnings. As they state that ‘late repayment may cause financial difficulty’.
Moreover, these risk warnings do not improve the safety of payday loans. Yet they can help people become more aware of their financial decisions.
Payday loans and the FCA: 2015
The FCA introduced various price caps and regulations in January 2015. These ensure all borrowers are treated well by lenders. Furthermore they also restrict the level of debt a person can get into.
In the five months following the introduction of these caps, the total amount of payday loan borrowing reduced by 35%.
£15 default fee cap
Borrowers that miss their repayment deadlines are often in financial difficulty.
The Financial Conduct Authority set a default fee cap of £15.
The cap ensures that lenders do not charge excessive fees for administration.
Greatest interest of 0.8% per day
High interest rates can send borrowers into a debt spiral. The FCA addressed this by capping interest at 0.8%.
In real terms, this means that 80p of interest would get charged each day for a £100 payday loan.
On a £100 loan over a full month, £24 of interest would get added to the original debt.
Total cost cap of 100%
In the past, borrowers have struggled with rising debts as a result of their interest payments, along with fees and charges.
Now, the Financial Conduct Authority ensures no borrower ever pays back more than 200% of their original borrowing.
If you borrow £100, the most that you will ever repay is £200 in total – regardless of interest rates. This remains so even if you struggle to make your repayments and have interest and charges added on.
The safety of payday loans: summary
Payday loans are amongst the safest credit options that you can choose. Yet, previous criticisms have resulted in a monitored payday loan industry. All loan providers are now authorised and regulated by the Financial Conduct Authority.
The Financial Services Register is a valuable tool for consumers. You can use the register to check that your chosen lender is operating legally and is authorised.
Once you have borrowed money, you will find peace of mind in the FCA’s price caps. Because they limit the amount that you will pay back.
The FCA’s caps keep interest at a good level, whilst making sure your payday loan debt cannot spiral.
There are always risks associated with borrowing money. You should consider your options and repayment plans before applying for a loan.
If you decide a payday loan is the right form of credit, you can select from authorised lenders.
By using the Financial Services Register, you can be confident you are browsing regulated loan providers.
The Financial Ombudsman can handle financial complaints. Because, the service provides further protection if you are unhappy with the service you receive.
The changes over the last couple of years have meant that the safety of payday loans has improved.
Consumers can now be much more confident when making applications.