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Will payday loans become a thing of the past?


A few months ago, you could not watch TV, listen to the radio or read a newspaper without noticing the large amount of payday loan adverts. Catchy jingles, puppets and C-list celebs were all used to try to tempt us into “quick and easy” money, which could be in our bank accounts “in just five minutes!” I don’t know if you have noticed, but I have begun to see less and less of these. What has changed? Are people using alternatives? I’m in no way complaining about this, but decided to have a little look into the state of the payday loan market in the UK.

New rules and regulations

At the beginning of this year, the body that regulates all financial firms, the Financial Conduct Authority (FCA), brought in new regulations for payday loan providers. These were put in place to protect consumers, and included changes such as:

• A cost cap on interest and fees of 0.8% per day- interest and fees a person receives must not be more than 0.8% per day of the amount borrowed.

• A £15 fix on default fees- If borrowers do not repay their loans on time, the charges they receive must not be more than £15.

• A total cost cap of 100%- Borrowers will never pay back more in fees and interest than the original amount borrowed

Now, no borrower will ever have to pay back more than twice the amount they originally borrowed, and there are tighter regulations on fees. For example, someone taking out a loan for 30 days will not pay more than £24 in fees and charges per £100 borrowed.

This is great news for consumers. The changes will save people a lot of money, and will help keep them from spiralling into a circle of debt.

After these rules were introduced, the FCA claimed that up to 99% of the UKs payday lenders might shut down, as many companies were predicted to be more likely to withdraw from the market rather than change their prices and interest rates.

In just seven months, the number of payday lenders in the UK has shrunk by a third. Other companies seem to be going the same way, with Wonga and Cash Genie both facing fines and having to make large numbers of staff redundant.

Rise of the payday loan alternatives

Sheffield Money
Sheffield Money was only launched this summer, and is a new way to tackle debt in poor areas. It has been created to compete with high interest, high fee payday lenders, and offers financial products to people with bad credit histories, with much lower interest rates than they would usually be able to get. Although it seems too good to be true, it is a not-for-profit community benefit society. This means that it works for the benefit of Sheffield Residents, rather than with the intention of gaining profit. It offers local residents loans of up to £7,500, and aims to bring together responsible lending and independent money and debt advice.

The service is set to save Sheffield residents £20 million just in its first year. The interest rates it offers are not the lowest on the market, but Sheffield Money is aimed at people with bad credit histories, who would be excluded from the best rate offers anyway, and would likely only be able to get high cost loans.

Could this be the beginning of a new trend? Only time will tell if Sheffield Money will have a positive impact on the area. If it does help people out of debt, don’t be surprised if more pop up around the country.

Credit Union improvements
There are also many other traditional well established alternatives to payday loans. Credit unions have been increasing in popularity recently, which is possibly linked to the reduction in payday loan companies. The industry is also being modernised, after a contract worth over £38 million was awarded to them by the previous coalition government. The on-going modernisation will enable credit unions to help an extra one million people by 2019. Could the improvements of credit unions help tackle the payday loans industry and become the primary source of short term credit?

Industry is still failing customers

Even after the new FCA payday loan regulations came into effect, the regulator concluded that still too many payday loan firms were failing customers. In March this year, the FCA released a report that found "serious non-compliance and unfair practices" in all the firms it examined. It discovered the some firms were:

• failing to recognise customers in difficulty

• not directing people to free debt advice

• failing to investigate customer complaints

• engaging in misleading practices to get payments from customers

• wrongly adding fees and charges to bills
The FCA believes more work needs to be done to improve the customer experience in all payday loans companies.

Beginning of the end?

When the new regulations were introduced, the FCA said that each and every payday loans company must apply for authorisation. They are now in the process of deciding who can continue in business and who can not. Will the next few months see the end of many well known payday loans companies?

What do you think? Do you believe people would be much better off without payday loans, or do you think they are a necessity for some and should be respected as that? Do you have any experiences with payday loans you would like to share with us?

Let us know by tweeting us @Financialuk.

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