As payday loan companies are being scrutinised more and more for improper lending and collection methods, coupled with the change in the regulatory body from the OFT/Office of Fair Trading to the FCA/Financial Conduct Authority, add in all the bad press payday lenders receive, and recently Wonga having to write off £220 million worth of loans, one may ask, is this the end of payday loans?
Part of the reason for this growth is the ease at which someone can obtain a payday loan. If you have a job and a bank account, you pretty much qualify. No credit, or poor credit isn’t an issue.
Another reason is how quickly the loan money can be in your account, in many instances within an hour. That’s fast.
A few years ago the banks tightened up their lending of loans, making it more difficult for people to get loans. Then as more and more people were finding themselves struggling with bills and debts and having poor credit, payday loans seemed to be good solution for someone in that predicament who was needing a loan.
Payday loans filled a void in granting loans and being able to obtain a loan. If someone had weak or poor credit, the banks would not lend to them, but they could qualify for a payday loan.
Let’s look at some of the reasons the payday loan industry is not just changing, but could be going the way of the Dodo.
OFT To FCA Change
Beginning in April of this year, the regulation of payday lenders transferred from the OFT/Office of Fair Trading to the FCA/Financial Conduct Authority. With this change in governing bodies also came some other changes in how payday lenders could lend.
These other changes were price caps, so borrowers never paid back three (3) or four (4) times what they borrowed. There were to be changes in how payday loans are advertised, and also the lenders are required to be transparent with all fees and charges, and advise clients what can happen if they do not or cannot repay their loan.
With these changes in the industry, and the investigation into Wonga’s lending and collection practices, has brought with it some bad press.
Payday lenders have been called, “legal loan sharks”.
Initially, payday loans were given bad press due to their high interest rates. While the rates themselves are high, the fact is that payday loans are meant to be short-term loans. When you look at the APR or annualised percentage rate, the rates appear as 1700% to as high as 2500%!
There also has been criticism about the adverts used by payday lenders. Many of these adverts trivialise borrowing, and one even suggested taking out a payday loan for a drunken weekend.
Payday lender Cash Lady, used twice bankrupt Kerry Katona as a spokes person. After receiving complaints, the Advertising Standards Authority banned the ad.
Do Payday Loans Exploit Vulnerable People?
Do payday loans target vulnerable borrowers?
The bottom line in lending money is that you want to get it back, you want to be repaid. If you constantly and consistently lend money to people you know do not have the ability to repay it, you will be out of business.
Many of us over the period of our banking and borrowing lives may have fallen into arrears with an account, or worse yet, had a repossession, CCJ, or some other credit damaging issue. And once something negative goes on our credit histories, it stays there for six (6) years. Which is a considerable period of time.
Now move forward to the present day; we have a spotty credit history, and find ourselves struggling each month, and then out of the blue a financial emergency arises. Maybe it is a car that needs repaired, or the washer goes on the fritz, but something comes up where we need a bit of extra cash. Where to turn???
Many of us are turning to payday loans, and why you ask…..because credit history is not a criteria to qualify for a payday loan.
As long as you are working, earning a wage, and have a bank account, you can apply for, be approved, and receive the cash, in some instances, all within an hour.
Are these loans targeted to exploit, they shouldn’t be if underwritten properly, meaning the lender makes sure the borrow can afford to repay the loan.
It is when the payday lenders do not properly underwrite the loan and follow due diligence to confirm affordability, that there is a break down in the system, and it could appear they are taking advantage of someone in a vulnerable financial position.
What If There Are No More Payday Loans?
If there were no more payday loans, financial evolution would in all probability find another way to lend money. Meaning, there will always be “payday type” lenders.
In a worse-case-scenario, unfortunate financially vulnerable borrowers will turn to loan sharks.
Payday loans fill a void in the money lending and borrowing money market.
So are payday loans history, probably not. However, there is going to be some major changes in the industry, and these changes could make it more difficult for some people who previously qualified for a payday loan, to no longer qualify.
As to if that is a bad thing, again, probably not. The numbers of those who were struggling to repay their payday loans speak for itself. Of those in arrears with the loans, many should not have received them as they clearly could not repay them.
The industry needed a “shake-up”, and with the new regulations many unscrupulous lenders will be forced out of business, making it a better, and safer lending and borrowing environment for all consumers.
– See more at: https://www.buddyloans.com/blog/are-payday-loans-history/#sthash.aB381BT3.dpuf