Finance

FCA Guidelines for Payday Lending

Drastic times call for drastic measures. We rarely introspect our borrowing decisions during a critical moment. And thus, many of us end up resorting to payday loan and alternatives to cope with such expenses.

Payday loans are a commonly known High-Cost-Short-Term credit alternative. But these loans are replete with profound repayment implications and unreasonable interest rates. So, how does one accommodate funds during unprecedented times?

In recent times, the FCA implemented a set of guidelines pertaining to payday lending in the UK. Read on to find out how the FCA’s intervention has impacted the UK’s payday industry.

What are payday loans?

Payday loans are a part of the umbrella of high-cost short-term credit solutions. They are designed to help credit-challenged borrowers obtain a quick cash advance to tide over a financial crisis. This could be an emergency medical bill, unplanned car repair or an unforeseen trip.

Depending on your lender, you can typically borrow £1000 to £2000, payable within a week or a month. Since payday lenders deal in smaller loan amounts, these loans have a reasonably quick disbursal.

Payday loans have always had a reputation in the lending industry – they are one of the most ill-famed forms of short-term credit. Payday loans come at excessively high interest rates and APRs, with the average APR sometimes crossing a staggering 300%.

Many individuals who borrow payday loans without completely understanding the terms and conditions end up in a vicious debt cycle. They often take on additional debt to pay off their payday loan. Payday loans might potentially push you further into debt, especially if you have a low credit score.

Does the FCA regulate payday loans?

The soaring prices and rampant popularity of payday loans were a cause of concern for authorities, mainly the Financial Conduct Authority (FCA). In addition, there were speculations about borrowers filing complaints against payday lenders, stating that they were not made aware of the gravity of the interest implications.

This did not sit well with the FCA. It wasn’t long after this that the FCA to implemented restrictions on payday loans. One such restriction from the FCA’s guidelines was the price capping that on payday loans, according to which lenders would now be unable to charge you over £24 over a 30-day term for every £100 that you borrow.

Furthermore, the maximum penalty that a lender can impose on missed payments is £15, plus the interest payable on your loan. The overall price cap ensures that the lender doesn’t charge you over twice the original amount you borrowed.

These changes significantly assisted in safeguarding the interest of consumers and minimising the possibility of exploitation by lenders. Lenders who wish to deal in payday loans are required to comply with the FCA’s payday loans rules.

What was the impact of the FCA’s intervention on payday loans? 

Ever since the FCA implemented stricter regulations and price-capping on payday loans, there has been a considerable drop in the number of lenders who deal in payday. The number of borrowers has, however, increased. The lenders now serving customers must do so within the FCA regulations and improve the market reputation of High-Cost Short-Term Credit providers.

These regulations have affected the advertising standards of tech goliaths like Facebook and Google, which have restricted explicit financial advertisements. The FCA’s initiative is a turning point in ensuring fairer credit opportunities and removing exploitation from the payday lending industry.

What to consider when borrowing a payday loan?

Payday loans are meant to cope with urgent expenses. Unfortunately, people with a below-average credit rating looking for quick cash to tide over a financial crisis are prime marketing targets of payday lenders. This is because many of these applicants may have faced rejection from lenders in the past before resorting to payday loans.

However, payday loans have high interest rates and APRs. The interest rate is high as it is, regardless of your credit score and overall financial circumstances. So, you may be able to get yourself a payday loan with a low credit score, but it’ll cost you much more than other financial products – a personal loan or secured loan.

So, while there are upsides to the strict FCA regulations and price capping on payday loans, there is still no gauge on the borrower’s repayment capability. Such credit products can throw you further off-course.

Consider these four alternatives to payday loans
  • Personal Loans: Personal loans allow you to spread your loan into small and affordable monthly instalments that you can repay over a longer span, giving you ample time to accumulate funds.
  • Credit Unions: Credit unions function like non-profit financial co-operatives that lend money to union members seeking financial aid. The interest rates for credit union loans are as low as 3%. Members of a credit union are associated with each other in some way – living in the same area or working in the same profession.
  • Guarantor Loans: If your credit history is tarnished, some personal loan lenders may agree to lend you money, provided you present a guarantor. A guarantor is a friend or family member who partakes in the loan’s obligations by co-signing the agreement. If you fail to repay, the onus of repayments befalls your guarantor.
  • Salary Advance: Explain your financial crisis to your boss and ask them for an advance on your salary. If you are a benefits claimant waiting for your first check, you can request assistance from Jobcentre Plus for a short-term advance. You can then pay off the advance from your benefits payment.
Conclusion

HCST credit options are often easy to access but come with excessively high-interest rates. If you’re trying to move out of the debt tunnel, borrowing a payday loan may throw you further off the rails. Weigh your options smartly and make an informed borrowing decision, or you may harm your financial stability in the long run.

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