Before 2014, payday loans were one of the increasing needs in the UK. One of the most common questions asked to the legal advisors was that why is government allowing payday loans. Before 2014, the payday lenders used to charge around 1000% per annum. However, the Financial Conduct Authority introduced new rules for lenders, setting up cap rates in 2014. While it brought a sigh of relief for borrowers who were unable to manage their finances and creditworthiness, it also made getting payday loan more complex.
The FCA’s Executive Chief, Martin Wheatley claimed that the new rules have been introduced to help the borrowers end the payday loan cycle. According to the Executive Chief, the cap on payday charges and fees is useful to provide substantial protections to the borrowers, who want to repay the payday loans. The price cap rates have been left unchanged since then.
The Initial Cost Cap
The Financial Conduct Authority has fixed the first day’s cap rate as 0.8% per day. Even if the borrowers obtain payday loan for one day only, the lenders will not charge more than 0.8% cap.
Fixed Default Charges
The cap rate for default penalty is £15. The lenders cannot charge more than £15 if the borrower becomes defaulter of the payday loan. The Financial Conduct Authority has also fixed the delayed interest amounts. According to FCA, the lenders cannot change the interest cap rate of the defaulter. The lenders will apply interest on the unpaid balances but the first interest applied on initial capital will be considered as the final interest.
100% Cap Cost
The aforementioned rules have been designed according to the concept of 100% cap cost. The Financial Conduct Authority wants to ensure that the borrowers do not pay more than 100% of the initial return.
Limitation to Two Failed CPAs
A majority of the lenders choose Continuous Payment Authority to receive repayments. In Continuous Payment Authority, lenders can ask the borrowers to make repayments on any date after two weeks of borrowing date. They are not obliged to mention the amount of repayment, which is why, many lenders used to ask for full repayment. The Continuous Payment Authority rules state that the payday return will be marked as a failed attempt if the transaction was not proceeded by any party other than the lender. This means that a failed attempt will be marked if the salary is not received or if the borrower stops repayment by asking the bank. According to the new FCA rules, the lenders can automatically withdraw money from your account twice only. If there is no money in the bank i.e. the transaction is stopped twice, then CPA will record it as two failed attempts. After two failed attempts, the lenders will contact the borrower to make the repayments i.e. the transaction will be automatically blocked by the bank.
Brexit and Payday Lending Industry
The subprime payday lending industry expected a boom in the demand of payday loans after Brexit. According to the Reuters report, Brexit will dampen the growth of payday lending industry and increase joblessness. These factors will make it even harder to get mainstream loans. The Money Charity report claims that Britons owe around 1.5 trillion pounds and the government support for social needs is insufficient. Therefore, people look up to alternatives and often choose unsecured loans like payday loans and guarantor loans.
Restriction of Partial Repayments
Previously, the payday lenders were able to obtain partial payments from the borrowers. The new rules of Financial Conduct Authority restrict the lenders to obtain partial payments. The repayment will be issued to the lenders only if the borrower has full repayment amount in the bank. This restriction goes alongside the restriction of obtaining the repayment for more than two times.
Considering the aforementioned rules, it seems that the Financial Conduct Authority has made payday borrowing more flexible. However, the authority has tweaked rules for both, payday lenders and borrowers. The Financial Conduct Authority has mentioned all payday companies to display a risk warning sign for payday borrowers. The warning is a disclaimer, stating that late payments can cause serious problems to the payday borrowers and they should contact moneyadviceservice.org.uk for assistance. The display has been issued on all electronic communications from April 01, 2014 and on all non-electric communications from July 01, 2014.
Many payday borrowers are unaware that this warning has been issued by the Financial Conduct Authority, and not by the Private Lenders Association.
Information about Free Legal Advice Regarding Debt
The Banking Reform Act 2013 has been implemented by the Financial Conduct Authority. According to the act, payday lenders will not inform the borrowers to get free legal advice from the website of Financial Conduct Authority. The Authority has also set up a legal advice department for guiding people about:
- How to get rid of payday loan cycle- How to manage finances- How to re-budget- And more
Considering the reformed rules, it is quite evident that the payday borrowers will not receive more security and protection. The lenders cannot blackmail the borrowers or obtain higher interests. By stopping the partial payments, the Financial Conduct Authority has increased the borrower’s repayment potential on will, and not forced.
However, these rules have also made payday borrowing difficult. Many lenders not only ask for credit reports and job continuity report but they also require a document of legal advice. People can hire private legal advisors or get in touch with Money Advice Service for information, queries, and tips.
You can also visit Quiddi Compare to compare the payday loan rates of different lenders as well as tips to find the most suitable loans for you.