The current state of the UK payday loan industry
Today may not be the best time for payday loan lenders in the UK given the recent FCA actions to streamline the industry. However, experts argue that payday loans are here to stay.
The FCA recently capped the maximum interest charges at 0.8% a day and the escalating debt at not more than 100% to ensure the total cost of interest and applicable fees never exceeds the initial amount borrowed. Payday lenders like Wonga.com have also been reprimanded for unfair lending practices.
These measures have been welcomed in an effort to help end bad lending practices that have been affecting the payday loan industry for years.
According to the Ombudsman, although the number of complaints about the industry seem to be increasing, the increase is because of the ongoing compensation as well as borrowers being more informed about their rights. Furthermore, most of the complaints the Ombudsman is handling include complaints about banks, insurers, and other financial institutions and not just payday loan lenders.
As a result, the current notion that the payday industry in the UK is falling apart isn’t accurate. Although many payday lenders are expected to go out of business, payday loans will still remain in high demand. So, why are payday loans here to stay again?
The FCA is taking the necessary action
The FCA has assured UK payday loan borrowers that unfair lending practices will no longer be tolerated. For instance, the FCA has made sure that payday loan debts never spiral out of control again even in cases where borrowers default for a prolonged period. Your loan fees and interest can never exceed the loan amount going forward.
Although this rule has seen may payday lenders go out of business, the demand for payday loans is still very high. According to the Consumer Finance Association, a group which represents payday loan lenders like The Money Shop, QuickQuid, and Peachy, the demand for payday loans won’t disappear despite the current measures. According to the Consumer Finance Association Chief Executive, Russell Hamblin-Boone, people may start getting payday loans from fewer lenders, however, the payday loan demand and debt levels won’t change significantly.
The FCA’s actions have increased the confidence borrowers have in the industry, and this can only make the industry stronger.
There are no serious alternatives to payday loans yet
Payday loans are also here to stay because their position hasn’t been threatened yet. Although there are over 370 credit unions in the UK that serve numerous worker groups and communities, the unions are yet to develop the kind of capacity payday loan lenders have. Also, the loans may be cheap and convenient, however, they can’t be remotely compared to online payday loans.
Other alternatives for payday loans in the UK include bank account overdrafts that are free of fees. With such alternatives, customers don’t incur any fees and penalties. Payday loans are more appealing because excessive fees and penalties have been capped and you get payday loans instantly online with very little to no requirements. For instance, you don’t need to be an existing customer of a payday lender to take out a payday loan. This isn’t the case with bank account overdrafts.
The high cost of traditional credit is largely to blame. According to Labour MP, Stella Creasy, the high cost of traditional credit is behind the strong demand for payday loans in the UK. Although people are extra cautious about payday loans in the UK today, they can’t help but continue taking them because traditional forms of credit are still inaccessible to many because of high-interest rates.
In a nutshell, payday loans in the UK are yet to face serious competition. Although there are currently many types of short-term loans and credit sources in the UK, none is as appealing or as promising as payday loans.