Payday Loans FCA Regulations
Payday loan lenders in the UK were charging really exorbitant interest rates on loans before 2015. This really frustrated many borrowers who could simply never get out of debt despite paying much more than they borrowed. Some borrowers even went into bankruptcy; hence in 2015 the Financial Conduct Authority (FCA) came in and introduced stricter guidelines on payday lending to so as to regulate the market. This move by the FCA has greatly helped steer the market into stability by curtailing the exploitative capabilities of the system. Three main rules were enforced to facilitate those results. They are as follows:
Limits on Frequency of Roll-overs
When a borrower is not able to pay back an online loan, lenders offer the opportunity to extend the loan hence ‘roll-overs’. While the roll-overs worked well for some of the borrowers, the ones who repeatedly did it fell into unsustainable debt burden they could not pay off. The FCA then stepped in to ease this burden. The lending rules ensured limitations on roll-overs. This meant that the loan extensions were limited to only two roll-overs. Eventually, the debt had to come to a stop. This ensured that payday loans could no longer be rolled over forever. It has helped to ease the burden on borrowers who depend on roll-overs. They now have to think of ways to quickly pay off their loans.
A Price Cap on High-Cost Short-Term Credit
This price cap has really protected the borrower from the excessive charges of the HCSTC loans since it was discovered that some borrowers still did not understand how much they would have to repay. Previously, the rates were as high as 4% per day. Currently, the interest and fees must not exceed 0.8% per day of the amount borrowed. People were now well-informed about the interest rates, how much they would have pay each month and in total. They were also aware of the penalty of missing payments and how much in total they would have to pay by the end of their payday loan tenure.
Stronger Guidance on Financial Condition and Affordability Checks
Before enforcing this lending rule, the Financial Conduct Authority made a survey and came up with some findings:
- Some borrowers took out high-cost short-term credit loans when they already had other considerable debts hence they were burdened in paying off the payday loans.
- Some HCSTC lenders did not take reasonable steps to see if their borrowers could repay the loans.
With all these insights, the FCA then introduced mandatory affordability checks and guidance on the borrower’s own financial condition. This meant that the payday lenders would have to ensure that any individual applying for the loan can actually afford to pay it back with interest before approving it.
Due to these lending rules, some changes have been noted. Changes such as the introduction of instalment loans which have a typical tenure of 3-6 months. This has been a reprieve from the one month repayment period that was typical of payday loans. Even though the repayments have been made manageable, there will be more time for interest to build-up making them more expensive in the long run.
These regulations have greatly improved the system, putting to an end to questions such as; what regulators could do to protect borrowers from crippling debt, as well as ensuring that lenders do not withdraw from the market. There have been a few payday loan lenders who have struggled with the new regulations and gone into administration. This has ensured that borrowers are not driven to black market lenders. Consequently, the lending rules have certainly created a balance whereby the lenders and borrowers can conduct business fairly with none feeling the burden.