The Birth & Evolution Of The UK Payday Loan Industry

payday loans

Overview: Brief History

The Payday loan industry in the UK dates back to the early 90s. Initially, there were very few Payday loan lenders as the concept was fairly new and untested. Fast-forward two decades later to 2007-2008, which marked the onset of the global financial crisis, the industry was at its peak as it became extremely difficult for people to obtain credit facilities from mainstream financial institutions in the UK. Between the year 2006 and 2009, the number of people using Payday loans in the UK increased four times. 

Almost a decade after the recession, the Payday loan industry in the UK continues to enjoy tremendous growth. According to the FCA (Financial Conduct Authority), there are over 50,000 credit firms in the UK today offering Payday loan services. Approximately 200 of these firms are exclusively Payday lenders.

According to 2009 FCA statistics, 1.2 million people in the UK took out Payday loans amounting to 1.2 billion pounds. Approximately 4.1 million loans were taken out that year. Fast-forward three years later (2012), the size of the Payday loan industry had almost doubled in size to £2.2 billion.

Industry criticisms

This unprecedented growth came at a price. While the industry was at its peak, numerous complaints surfaced. Payday loan borrowers were increasingly complaining of various malpractices in the industry the most notable being the high interest rates, high late fees/charges and aggressive collection practices. These grievances caught the attention of the UK parliament in early 2010. 

The UK parliament pushed for investigations into the claims and suspect firms. Key legislation areas were identified the most notable revolving around the pricing of Payday loans, cloning of payday loan firms, flawed advertising practices and high late fees. The investigations revealed that the high charges among other malpractices were unwarranted given the fact that Payday loans don’t actually carry substantial risk as perceived by lenders in an effort to justify high fees and interest rate charges. In fact, Payday loans have been found to carry the same amount of lender risk as other forms of credit.

In 2014, several firms were reprimanded and directed to pay fines for illegal practices. Among them was which was reprimanded for unlawfully demanding payment on behalf of solicitors. Cash Genie was also reprimanded for imposing unlawful charges. 

Changes in UK law governing Payday loans

It wasn’t until April 2014 that the Payday loan industry in the UK got a major overhaul in all aspects from the way the loans are issued to the way they are repaid. The FCA set two main goals. One; to ensure all Payday loan lenders lend to borrowers who can afford the loans. Two; to ensure Payday loan borrowers were fully aware of the risks as well as cost implications of borrowing Payday loans or short term loans. Under this goal, the FCA also set out to ensure borrowers were aware of the correct cause of action in case they encountered financial difficulties meeting their repayment obligations. 

To achieve these goals;

· The FCA set an interest cap of 0.8% per day: You can’t pay more than 0.8% interest per day on your UK Payday loan. 

· The FCA has also fixed default fees at £15.

· The total cost cap has also been fixed at 100%: The entire cost of the loan can’t exceed the cost of the loan.

· The FCA has also put other stringent measures to drive up standards in the Payday loan industry in the UK. For instance, Payday loan firms will be subject to affordability tests going forward. Limits have also been set on rollovers and continuous payment authorities.

For the thousands of people who have struggled to repay Payday loans, these new laws have been a giant leap forward. They have restored sanity to an industry that had turned rogue.

Payday loan: Benefits to borrowers

Since UK Payday loan borrowers now enjoy a considerable amount of protection now more than ever before, there is absolutely no reason why they shouldn’t take advantage of the loans which come with great benefits such as;

1. Quick processing: You can get Payday loans or same day loans quickly (in less than an hour after application).

2. Great source of emergency cash: Payday loans are great sources of money for catering for emergencies such as car repairs and emergency medical bills when your payday is weeks away.

3. Few restrictions compared to other forms of financing: You just need a job to secure a Payday loan. 

4. No collateral: You don’t need an asset/collateral to secure a Payday loan

5. No credit checks: Payday loans lenders don’t do credit checks like other lenders before giving out loans. As a result, you can qualify for a Payday loan even if you have a poor credit score/rating. 

6. Fast and convenient application: Most, if not all, Payday loans lenders in the UK accept and process online loan applications 24/7. As a result, you can apply and get a Payday loan within minutes at the comfort of your home. Furthermore, the application process is easy. 

7. Favourable legislation: The UK Payday loan industry has favourable legislation that protects borrowers. With daily a 0.8% daily interest cap in place as well as a fixed total cost and default fees, borrowers are rest assured of protection. 

Mark Scott

Is the Company Director of Swift Money Limited. He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.