Recently the head of the FCA (Financial Conduct Authority) has said that new rules intended to change payday lending industry and clean it up from so called loan sharks. More likely these new regulations will lead to extermination of payday lenders so the whole industry will face significant changes.
New Rules and Restrictions
Financial regulator of the UK has set new rules and regulations intended to make payday lenders to limit interest rates they charge. And according to these rules daily fees should not exceed 0.8% of the loan amount. It’s worth noticing that payday loan lenders usually charge significantly higher interest rates because they provide unsecured credit products which are available to people with no or bad credit and it increases the risk that the borrower will fail to repay.
Also fees and interest rates should never exceed the value of the loan. Financial experts and analytics predict that only a few of the UK’s payday lenders will survive. For the moment there are more than 400 payday lenders in the UK. But it seems that new tough rules will make most of them disappear from the lending market.
At the same time some economists and experts who worked with FCA on development of the new policy say that the result of these rules will be that payday lending will just stop existing in the UK. They say that only “ethical and loyal companies” will still be able to operate and to make profit. Regulations will be valid from January, so next year is going to be really tough for the whole payday lending industry in the UK.
Possible Alternatives and Solutions
It seems that the new policy will allow only a few companies, for example, Wonga and Dollar Financial to stay in business. For the rest of the companies these conditions are unacceptable and more likely that they are going to close.
But FCA thinks that these changes will make consumers to pay attention to alternative lending options. It’s important to admit that payday lending and Internet loans are in demand. But next year the situation will change and probably, people will use small personal loans provided by local banks and credit unions.
Banks try to ensure FCA that they will be able to provide similar lending service almost to half of their clients. Also employers themselves want to offer their staff an ability to get money in advance when it’s necessary. But at the same time there are still many people who will not be able to use these ways of lending money. Most likely they will have to cut expenses and turn to their family and friends.
Financial experts explain that this policy is a part of a plan intended to develop the UK’s banking system for people who work and need to get financial assistance from time to time. Consumers use loans to borrow small amounts of money against their next paycheck but interest rates charged by some lenders were sky-high. That made many people get into the debt cycle and they were forced to apply for a loan to pay off the one they took out previously.