Akin to the United States, people in the United Kingdom are able to take out short-term loans until “payday”. These payday loans are advertised especially to those strapped for cash and in need of making an unexpected purchase. They are dished out with the expectation that the customer will repay within days or months, depending on the firm. One can avail payday loans in need of cash within minutes. In general, clients can apply for £50 upwards to £1000 for a given amount of time.
A Never Ending Cycle of Debt
Like other types of loans, late fees, extra interest and mounting debt plague those who cannot repay in the interim. The bigger controversy derives from firms alleged predatory role in trapping customers in a never-ending-cycle of debt through payday loans. In 2011-2012, as many as 8.2 million loans were estimated to be taken out by roughly 1.5 million clients. With astronomical APR’s set by lenders, the borrowed pocket change becomes more of a hassle than a quick way to pay off a utility bill or a family emergency crisis.
FCA Could Help the Borrowers Somehow
To combat this, the Financial Conduct Authority (FCA) imposed several regulations on lenders in response to mounting debt and ever-increasing revenue. The FCA has cracked down on irresponsible practices by enforcing lenders to assess borrowers’ repayment ability, requiring documentation to prove the client can repay the lender. They have also capped interest at 0.8% for each day a client borrows money. If they fail to repay on time, late fees may not exceed £15, whereas in the past clients could get hit with £20 or more. Most beneficial to the millions of borrowers of payday loans is that the total cost for taking out a loan will never exceed 100% of the original loan. This ensures that every client will never have to repay more than twice the original amount.
These regulations were put in place in early 2015 so customers would actually have a “payday” that isn’t compromised by irresponsible lenders. The FCA plans to examine the effects of these regulations and review all caps in 2017.