Why payday loan interest was capped in the UK

Henry Githinji

Henry Githinji

Henry plans to be an entrepreneur with his own financial consultancy firm, specializing in in binary options and stock trading. Henry is a day trader and plans to use the capital he makes to launch his business. He plans to build a portfolio that attracts investors through his trading performance.
Henry Githinji

Why payday loan interest was capped in the UK

 

Payday lending has been surrounded by controversy since it first came into the scene as an important player in the market of consumer credit. Therefore, it comes as no surprise that payday loan interest was capped in the UK. There was increased concern that payday lending was taking advantage of borrower vulnerability, hence the need for a regulatory response. There was also compelling evidence that most of the payday lenders were giving loans to borrowers who were financially vulnerable and not in a position to afford those loans which ultimately led to high-interest rates.

 

 

Interest was capped by the regulator

Interest was capped by the regulator

It has been discovered that there are two reasons why payday lenders do not prioritize assessment and monitoring of the capability of their borrowers to repay their loans. One of them is that payday lenders get a big portion of their revenue from giving loans to particular borrowers repeatedly whereby he or she uses the fresh loan to repay the previous one including the accrued charges and interest. The second reason is that payday lenders possess continuous payment authority which they can use to recover what the borrowers owe them by directly debiting their bank accounts. This is one of the debt recovery tools that payday lenders have found to be highly effective. However, payday lenders have hotly contested these allegations, saying that they are not exploiting borrowers who are financially vulnerable.

 

 

Continuous payment authority that is eagerly used by payday lenders to service payday loans in the UK has created significant problems for borrowers whose income is low or those who depend on welfare benefits. It is not surprising that payday lenders make debts out of borrowers’ accounts at the specific time when they receive their salary, benefits for social welfare or wages. This can result to the borrower resorting to seeking more payday loans to cater for their daily expenses.
Payday lenders have also abused the power of continuous payment authorities by taking large amounts from the borrower’s bank account than mutually agreed. Thus, if any money is deposited in the borrowers’ accounts, it will be taken without their knowledge causing them to opt for more payday loans.

 

 

The effect it has had on the industry

 

Payday caps

Payday caps

Since the interest on payday loans was capped, payday lenders in the UK have resorted to increasing the number of payday loans to borrowers in order to entice more customers. They are slowly departing from the previous approach of making payday loans appear different from other forms of consumer credit. With the borrowers protected, the number of payday loans has grown more than ever due to the new regulations. However, payday lenders and their associations in the industry have not taken the new regulation lightly and are strongly contesting it with the hope that it will go back into favoring them more.

 

People who depend on social welfare benefits may no longer be able to get access to payday loans because as much as the payday loan interests have been capped, their low incomes are not enough to make a profit for the payday lenders.

 

Conclusion

 

The increased popularity of payday lending in the UK has led to increased regulatory scrutiny of the practices of payday lenders and the borrowers’ consequences. Consumer and welfare organizations in the UK have not relented on the fact that payday loans cause substantial hardship to borrowers who are already financially strained. As much as these issues continue to be hotly debated, payday loans continue to thrive and many people still need them.

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