The Much-Needed Changes in Payday Loans
Payday loans are short-term loans that need to be repaid on the next payday of the borrower. These loans have high interest rates. The market of payday loans grew by leaps and bounds in the last financial crisis, and a large number of payday loans are now issued in the United States every year. These numbers are also expected to go up as the inflation rates increase.
However, as the payday loans gained popularity amongst the masses, the lenders started misusing their power and adopted unethical practices like illegal methods of money collection and opaque terms and conditions. However, the consumer groups protested against these practices which led to the much-needed regulatory interventions.
In order to make the payday loan repayment more easy and simple for the borrowers, the payday lending market is making significant changes. It looks like the industry is making honest efforts to overcome their shortcomings.
Catering to the public outrage, the regulatory changes were imposed at the beginning of 2015. A series of actions were introduced by the FCA i.e. Financial Conduct Authority to protect the borrower’s rights.
These actions include:
- A regular, unaltered interest rate along with a fee cap lent.
- A cap on late payment fees.
- A total cap on the maximum amount of money that any borrower will pay in terms of interest and default fees being equivalent to double the advance amount.
These regulations have forced the deceitful players to shut their shops and most of the payday loan lenders are revising their overall business and adopting the right approach towards dept collection and customer care.
In the United States, almost 75% people have a household income below $25,000. Moreover, most of the payday loan borrowers don’t possess bank accounts and have poor credit histories. This makes them highly vulnerable targets of the loan lenders.
Most of the payday loan holders also have much lower household income as compared to the national average. According to the recent estimation of the FCA, the amount and number of payday loans borrowed has decreased by 35% since the implementation of the new regulations. More than 75,000 customers were prohibited to gain access to the loan market due to this.
The FCA considers it to be a highly positive change. As there’s great emphasis on the affordability check of the loan borrower. Those who’re unable to repay the loans are not granted the loans in the first place, thereby saving them from falling in the pitfall of repeated loan renewal, late fees, and stacked up interest amounts.
However, it’s also important to stop these borrowers from approaching the unregulated and unethical money lenders or any other dangerous finance stream. For this purpose, efforts are being made by authorities to increase the financial literacy of the general public. FCA has also proposed the idea of increased funding of consumer support groups to help those suffering from financial crisis.