Have Payday Loans Improved over the Years? – Conclusion: How Much the Payday Loan Industry has Changed & Areas that Need Improvement and/or Further Regulation
Has the payday loan industry changed for the better or for the worse? In this article, payday loan direct lender Payday Loans Net, concludes the guide about how much the payday loan industry has changed since the FCA introduced the regulations. Read on to find out how mych we have changed and what changes are still being recommended.
In our concluding chapter, we draw together all the research and recommendations about payday loans in 2017 with information covering:
- Transparency about the overall cost of a payday loan
- Affordability checks
- Misuse of a Continuous Payment Authority (CPA)
- Extra charges and spiralling debts
- The treatment of loan defaulters – debt-chasing tactics; agreeing on an affordable repayment plan
- New business models in the payday loan industry
Having considered the report released by Citizens Advice in August 2016 and other research carried out by other organisations, there’s no doubt that there have been massive improvements in the payday loan industry. Stronger regulations and the departure of unprincipled lenders. (Who didn’t apply for FCA authorisation) have led to fewer consumers suffering from unethical business practices.
Before weighing up all the conclusions, we can draw from this guide, let’s look at these changes in detail concentrating on areas which caused problems in the past and ones which were picked out for criticism in the research we’ve studied.
Payday Loan costs
FCA regulations were concerned that companies’ APR should feature prominently in advertisements and on company websites. This is to ensure complete transparency of the terms of the loan. In research, many consumers have made it clear that they didn’t understand its meaning. However, lenders’ use of a pictorial slider means that all of them can grasp how much the final cost of their short-term loan will be as explained in Ch.2 and this is the single most important piece of information for most people. This is a key improvement in the industry since before 2014. Many people were borrowing then without a clear idea of how much they’d have to repay.
Nobody takes out a loan with the intention of defaulting. One area which they picked for criticism was the fact that many borrowers were unaware of how much their payday UK loan would cost if they missed one or more payments. Nor were they aware of how much they could save if they paid back their loan early. Citizens Advice recommended that these two pieces of information should also be in the Consumer Credit Sourcebook. In this way, borrowers could make a well-informed decision.
The CMA agreed with their recommendations. They also believed that greater transparency could be possible if borrowers were able to research the market and compare the prices of loans from different companies as explained in Ch.7. This suggestion has since become the law. As of June 2017, all payday loan providers must appear on at least one online price comparison site. How much this will improve customers’ payday loan experience remains to be seen.
Affordability and Credit Checks
The question of how much better affordability checks are post-regulation remains controversial. The fact that borrowers were nearly twice as likely to get into financial difficulties if credit-worthiness assessments were inadequate or non-existent is undeniable.
Approval rates for payday loans are falling. All research agrees that a sector of the population has does not get access to them. (The estimates of the numbers affected vary from 600,000-800,000 people). However, the sophistication of computerised risk models used by payday lenders varies. There are question marks about how thorough some companies are in checking applicants’ expenses. As well as credit history rather than just their income.
Responsible lenders who abide by the Good Practice Customer Charter are in the majority. However, unfortunately, there are still online companies which advertise the fact that they carry out no checks through a credit reference agency. There is only one solution to prevent them from continuing to ignore FCA guidelines. (And possibly giving loans to borrowers who would otherwise be turned down by other lenders). It would be to make affordability checks compulsory with strict criteria set out by the FCA.
Misuse of a Continuous Payment Authority (CPA)
Citizens Advice found no proof of payday lenders misusing CPAs. No one reported that lenders had tried to take payments from their account more than twice. Nor was it reported that they were taking part payment of the loan. (And possibly wiping out their entire savings as used to happen before FCA regulations).
The only worrying trend they found was a few cases of lenders accessing the borrowers’ internet banking to adjust funds. However, it was clear from the research that this involved a small number of lenders. It didn’t apply to the whole industry.
Citizens Advice found no evidence of the payday loan industry charging more than they were legally entitled to according to post-cap regulations. The days of lenders imposing extra charges on a loan; allowing payments to roll over again and again and/or imposing steep default payments are definitely over. This has made the average borrower’s payday loan experience much more positive. Not only is repeat borrowing discouraged. But the fact that borrowers are directed towards debt advice much earlier means that they’re able to seek help while their debts are still manageable.
Complaints to the FOS
There was no evidence of payday loan companies charging more than 15 pounds in default fees. There was also no evidence of demanding that borrowers pay back more than twice the sum they’d borrowed. The treatment of those who were late in making their loan repayments was a cause for concern. The two main issues (and both major sources of complaints addressed to the Financial Ombudsman Service) were the debt-chasing tactics of some companies. Secondle, it was the failure of lenders and borrowers to reach agreement on a repayment plan.
Debt Collection Tactics
Continual phone calls or the threat of legal action are unacceptable debt-chasing tactics. They don’t belong in the payday industry of 2017 although both got mentioned in reports by debt advice charities/agencies. FCA regulations make it clear that efforts should be made to provide sympathetic support. For those borrowers who default on their loan agreements. Especially when the loan provider did get told of the reasons why they’re late in making repayments.
One may argue that such tactics are self-defeating. If customers get treated in this way, they’re less likely to communicate with the company and come up with a plan to pay back the money they owe. Since they don’t believe they’ll get treated fairly and compassionately. This might help to explain why around only half of defaulters get in touch with their payday loans direct lender. Their sense of shame is made worse by the feeling that they won’t get treated sympathetically.
Agreeing on an Affordable Repayment Plan
Another source of criticism was the inability of some companies to meet defaulters halfway. So they can make a start on repaying the money they borrowed even if they can only afford to make token repayments for a time. Although the FCA highly recommended it in their guidelines, some companies choose to ignore it.
Of course, this isn’t true of all companies in the payday loan industry. However, the lessons of the past have shown us that often the few can be enough to give a bad name to the many. If these specific payday lenders can’t clean up their act on a voluntary basis, then the solution must inevitably be to make these guidelines obligatory. When faced with the possibility of a fine from the FCA and possibly compensation, such companies will knuckle under and follow the rules.
New Business Models in the Payday Loan Industry
There is another cause for concern which has arisen from the research carried out into the payday loan industry post-regulation. It is the problem of new business models. We highlighted two different changes in the sector.
The first is the switch in the length of short-term loans. From an average of 21-28 days, many loan providers now give borrowers the option to apply for a loan over a longer period, most commonly 3-6 months. A change in how customers can get loans raises questions about whether the regulations which currently apply to the sector suit the financial product which is on offer. Both Citizens Advice and StepChange have pointed out the necessity to investigate – and if necessary modify – the regulations especially regarding the price cap.
The other change was mentioned in the Citizens Advice report although it was apparent that it only affected some borrowers and was a consequence of these medium-term loans. Borrowers were being offered a further loan even though they hadn’t applied for one while those who had paid off a loan found that the funds were still available to them until the term of the loan ended. Of course, both instances are examples of unsolicited loans and are at best dubious business practices. Some borrowers have temptations by this ‘extra’ money, and some went on to get into financial difficulties as a result.
Having weighed up all the evidence available about the payday loan industry and compared it to the sector before the FCA took over, it becomes apparent that things have improved a great deal for consumers. However, there remains room for improvement.
What also becomes apparent is that bad business practices only affect a small proportion of the industry. But unfortunately, this small number of unprincipled payday loan providers is enough to tarnish the reputation of the whole industry. This is why borrowers need to check out their loan provider before they borrow money. A reputable company can ensure a positive payday loan experience as explained in Ch.8.
The other thing to remember is that compared to other financial products in the UK, payday loans UK are really in their infancy. They may have got off to a shaky start but they’ve made great progress. As the industry changes and develops, the most important thing is that it remains under the scrutiny of the FCA so that regulations continue to protect consumers by reflecting their payday loan experiences. For any industry, regulations will never reach a state of perfection but continue to change and evolve along with the industry itself.