by Ella Mason
Constant criticism and a barrage of TV programmes and newspaper reports highlighting the dangers of payday loans have prompted the Government to introduce an interest cap in the Banking Reform Bill. The financial industry regulator, the Financial Conduct Authority (FCA) is expected to bring in these changes in 2014.
Households in difficulty
As a result of the credit squeeze, following the recent global recession, an increasing number of families turned to the payday loan companies when banks and credit card companies declined their loan applications. Payday loans are appealing because they carry out minimal credit checks and the customer will receive their loan within seconds. You can click here to read some of the pitfalls of one of these types of loans. Unfortunately if you lose your job, or cannot pay back the loan on the ‘promise date,’ you will become liable for additional fees and high interest charges will be added on to your original debt.
The FCA is planning to introduce the proposed cap in 2014. An article in The Daily Telegraph highlighted that the FCA will also insist the payday loan sector carries out stricter credit checks on customers, and would only be allowed to extend loans twice. Critics of payday loans welcome these proposals and urged their implementation.
The need for change
The Government plans to regulate the loan companies’ arrangement fees and penalty costs as well. For example, charges from one of these companies show that if a person borrows £150 for 30 days they will be charged an interest rate of 365% and a transmission fee of £5.50, which equates to an interest rate of 5853% APR. The total amount the customer will have to repay will be an astronomical £202.15. If a customer cannot repay this sum on time then the costs really start to mount up.
Australia already regulates the industry
A report on the BBC showed that the Australian Government became so concerned about the financial difficulties facing families who used the payday loan service, they have already introduced an interest and fee cap. Though, Australians will still face high penalties for late loan repayments, which in some cases will amount to twice the cost of the original loan. The UK’s Consumer Finance Association (CFA) has said that: ‘research from other countries where a cap has been introduced suggests price controls would lead to a reduction in access to credit and open up a larger market for illegal lenders.’
Can you really afford a payday loan?
If you are in really desperate circumstances and have a regular income, then you should use the Money Advice Service loan calculator to see if you can really afford to take out one of these loans. Most utilities companies, for example, offer payment schemes, which will prove to be a much cheaper way of coping with financial hardship. A payday loan should only be considered if you have no other way of obtaining credit and you are absolutely sure you can repay the loan on time.
About the Author
Ella Mason is a freelance writer.