Is the UK payday loan industry set for an end?

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Published: 20th November 2016
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Payday loans are small loans, typically of between 100 and 1000 which can be borrowed until you next get paid. They are always under scrutiny in the press because of their high interest rates which are often into the thousands of percent. With proper planning the loans are said to useful and can actually provide a cheaper alternative to falling into an unauthorised overdraft at the bank, however there are claims that lenders aren't making thorough enough affordability checks during the application processes and as a result many borrowers are falling into debt as a result of taking out a payday loan.

In this article we're going to look at the future of payday loans with new regulatory changes set to take place in 2014 as the FCA take over on April the 1st. Could we see an end for payday loans?

Firstly, we'd like to discuss the interest rates of these loans since this seems to be the centre of attention, and rightly so since as mentioned above they often fall into the thousands of percent. Fortunately, the APR figure (which is the figure picked up by the media) doesn't actually give a true reflection of the interest a borrower will have to repay on the loan. APR stands for Annual Percentage Rate and demonstrates the cost of the loan over the course of a year - since these loans are only designed to be taken out for a maximum duration of a month that figure isn't really much help. To arrive at the APR figure the actual interest of the loan, which is around 25% over a 31 day period has to be multiplied several times, and this is what generates that humongous figure that's always picked up on by the media.

Rightly so that figure shouldn't be ignored, because whilst it might not reflect the true interest you'd have to repay it does still show just how expensive payday loans are as a line of credit and should be a reminder.

So what's the point in displaying the APR figure?

Well the APR figure is basically a figure that demonstrates the true cost of a loan. It not only includes the interest rate but it also includes any fees involved too and is the figure used to compare finance deals (more can be read about APR here). By law any company offering finance must display the APR of their product, whether they are lending the money for a day, week, month or year.

So now that we've cleared APR up it might give you a different perspective on the loans. Undoubtedly they are an expensive means of credit, however they are designed as a one off loan to help with an unexpected bill and as mentioned above if used correctly could actually prove cheaper than getting hit with a late payment or unauthorised overdraft fee.

Now aside from the interest rates the main problem associated with payday loans is that some lenders had said to be lacking in making proper affordability checks before approving a loan, and as a result many borrowers were taking loans for amounts more than they could pay back and falling into debt.

The thing is, a loan lender of any sort makes their money by the borrower repaying the loan along with the interest - so why would any lender want to borrow money to someone who couldn't repay it? The answer is simple - they wouldn't.

Basically the issue is actually lack of data to the lender. When a borrower applies for a loan the lender carries out a credit check to get a view of the borrowers finances, the only issue is that at present these credit reports are not up to date and are in fact only updated once a month. This means that if the borrower was to apply with one lender, and then decide to apply to another, then the second lender would be totally unaware of their recent application or borrowing details and could approve the loan assuming that they are able to repay in when unfortunately they are in fact unaware of their recent commitment.

Thankfully though in 2014 that is set to change as a company named CallCredit is set to bring real time data to the industry which could drastically improve responsible lending across the board since the lenders would have a much better picture of the borrowers financial commitments.

With tighter checks in place it will mean less borrowers falling into difficulty with their loans and hopefully the payday loan industry will begin to get a better name for itself. Especially with stricter regulations coming into place to weed out any of the lenders who may still be operating irresponsibly.

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