The Financial Conduct Authority is considering introducing price caps on payday loans in the UK. These would limit the interest charged on short-term loans to 0.8% per day and cap the total fees and charges at 100 per cent of the initial loan. The proposals are expected to be published in July or January. The regulator is currently modelling how the new rules would affect payday loans.
High street payday lenders lack of awareness of cheaper options
Consumers are largely unaware of the cheaper options for payday loans. High street lenders advertise under conditions that are less advantageous than those of online lenders, and almost half of those that do shop around never actually compare rates. These factors make it difficult to find the most competitive deal. Consumers are also unaware of alternative methods of finance.
The absence of price competition means that customers end up paying higher prices than they should. As a result, the CMA is looking into ways to encourage competition between payday loan providers. This could include requiring lenders to disclose the source of their lead generation sources. This could result in consumers saving around PS45 million every year.
Interest rates are higher than mainstream lenders
Consumers should be aware of the high interest rates charged by high street payday lenders. Most people assume these businesses deal with relatively low-risk customers, but in fact, the interest rates are much higher than those of mainstream lenders. This is because payday lenders generally levy a “finance charge” on each loan, which includes service fees and interest. It is important for consumers to be aware of the exact interest rate charged before they sign on the dotted line. Thankfully, many states have laws limiting the amount of interest these lenders can charge.
Many states have enacted interest rate caps to limit payday lenders’ interest rates. These regulations are designed to prevent consumers from overpaying for small loans. Most states cap these interest rates at 36 percent. This protects all consumers from the damaging effects of high-cost loans.
Customers do not compare their fees to those of mainstream lenders
A review of payday lending practices has been requested by the Office of Fair Trading (OFT). These companies, which give loans to customers when they get their next pay, have risen sharply in the UK after the financial crisis. However, consumers and politicians have been critical of their fees and shoddy treatment of borrowers.
Payday lending is highly competitive – critics argue that payday lenders are more numerous than Starbucks! The competition between payday lenders tends to drive down prices. One study found that payday lenders’ prices were moving toward price caps.
Regulation of payday lenders could have unintended consequences
The Bureau of Consumer Financial Protection has raised concerns that the 2017 Final Rule for payday lenders could lead to unintended consequences. The proposed regulation could substitute payday lenders for other creditors and limit the number of loans a borrower can negotiate in a calendar year. This, in turn, could lower consumer welfare.
The Bureau of Consumer Financial Protection has placed emphasis on the findings of a Pew study, which indicates that payday borrowers have limited time to explore other options when they are facing a cash shortfall. The study also shows that payday borrowers are used to facing cash shortfalls, and they have tried various approaches to solve their shortfalls, such as applying for an overdraft or informal borrowing.