High rates of inflation mean more money to cover your existing expenses. On the other hand, it is safe to say that high inflation rates are not translated into higher median incomes. A majority of the UK population thus are left with the option of seeking a loan to meet their short-term financing needs when faced with a shortfall in terms of meeting their routine expenses.
A variety of loans are available in the market. However, increased demand in loans means higher rates of interest expenses. With the introduction of payday loans in the market, people with a monthly fixed salary can actually afford to get through a financial shortfall.
Payday loans are a specific amount of money that lenders lend on the condition that the borrower will return it in with their next paycheck. These are also called short-term loans and have higher interest rates then other types of loans.
FCA Rule Change pertaining to Payday Loans
Previously, you could borrow payday loans from any party. However, as the loans became more popular, the procedure was made to be authorized and regulated by Financial Conduct Authority (FCA). Initially the rules were rather relaxing. However, there were many cases where the borrowers were harassed or they were made to roll over the money for so many times that with the increasing interest and extra fees, the amount became impossible to pay. Therefore, FCA decided to tighten their policy and made new rules to regulate the payday lending procedure.
The objectives of these ensure that money is only handed out to the people who can actually afford to repay. And also, to ensure that the borrower knows about the risks involved if they fail to pay the loan back. The body also ensures that the borrowers are provided with help if they face any financial difficulty.
What the FCA New Rules Curtail
Taking into account the various difficulties related to payday lending, FCA decided to make a few very specific changes in the rules regarding payday lending.
FCA through introduction of the new rules tries to mitigate a few factors. Here is a brief summary of what these rules try to do.
Enforce an Upper Limit to the Times Lenders can Roll-Over
What is rolling over? When you decide to take a payday loan and are unable to pay it back in due time, you can go for the option of rolling over.
It simply means that you need more time to pay back the money and will return it next month. However, this decision also means that you will be charged an extra sum of money as fee and the interest will also apply. As a result, a small amount of money will turn into a large sum.
How does FCA address this issue? FCA has decided to put a limit on the number of times you can opt for roll over. Now you can only roll over the money two times and after that, you must pay it. This will keep you from spiraling loans. However, in emergency cases, you will have the chance to roll it over a third time as well. If your issues are serious and genuine, the authorities can also provide you with financial help to pay off your debt.
Continuous Payment Authority (CPA) is actually a method of money collection often used by payday lenders. This allows them to take money directly from your bank. Moreover, they can take any amount of money at any date.
This is a disastrous practice because even if it is their money they are taking back they do not have any idea of your financial situation. What if they take out all the money from your account? This might even hinder a borrower from paying bills that are more necessary.
However, the new FCA rules have limited the number of times CPA can be used. They can use it for only two times so they will not be able to continuously withdraw money from the borrower’s account.
Compulsory Warning Mechanism
Most cases, payday lenders usually decide to recover their loaned funds directly from the borrower’s bank account without even notifying the borrower. However, FCA has made it mandatory for lenders and creditors to issue a notification to borrowers before attempting to retrieve the funds directly from the borrower’s bank account. Also, the notification must contain a risk warning about fees and other extra charges in the case of rolling over.
Required Information for Free Debt
These new rules by the FCA have made it compulsory for all lenders and creditors to offer free information regarding the provision of free debt to borrowers whenever they require it.
What this does is that it solves the practice of unnecessary rolling over.
Moreover, the lenders are not allowed to make repeated calls. This is also a rule by FCA and if any lender follows this practice, it will be akin to harassment. If you find yourself in such a situation, you have the right to consult the authorities.
These new rules are the first step in making things easier for a borrower. However, you must understand that payday loans are a type of short-term loans that you should only opt for in case of emergency. If you are finding yourself continuously relying on this method of borrowing to cover your finances then it is high time you should stop and take a look at your expenditures. May be you need to cut some expenses and budget your finances. Instead of borrowing more, you should talk to your lender. They will give you good financial advice and must help you manage your finances in a better way. They are required to do that as [per the FCA rules.
Other ways to deal with a financial crisis include making your financial payments using a credit card as that will save you from paying extra interest if you decide to pay the complete amount.
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