The payday loan market has changed a great deal in recent years following the introduction of new lending rules by the governing Financial Conduct Authority. The good news for borrowers is that the new rules capped the amount of money they have to pay back when they take out a payday loan and that, if a borrower finds it difficult to pay the loan back, they have many more rights than they had before.
In this article, the 786 Loans team looks at:
- what a payday loan is,
- what a high-cost short term credit loan is,
- the difference between payday loans and short term loans,
- payday loans for bad credit applicants,
- the truth about no credit check payday loans,
- how the market changed after the introduction of the new rules, and
- how to apply for a loan through 786 Loans
What is a payday loan?
A payday loan is a type of loan which you agree to pay back the amount you borrowed plus the interest in one go on a date you agree with your lender. On many occasions, a borrower will simply ask their payday loan lender to take the money from their debit card or from their bank account on the day they receive their next lot of wages from their employer.
However, the choice of when the lender takes the money varies depending on the borrower but there is a general limit of no more than 35 days before a lender will want their money back.
High-cost short term credit loans (HCSTCL)
Payday loans belong to part of the financial sector called High-Cost Short Term Credit (HCSTC). The HCSTC market is enormous with 5.4 million loans made in the UK in the year to 30th June 2018.
What makes a loan a high-cost short term credit loan is open to interpretation however the Financial Conduct Authority (FCA) defines an HCSTC loan as a loan with an APR of 100% or more where the value of the loan plus the interest is repaid by the borrower within a 12 month period.
A few years ago, there was a lot of pressure from politicians and other campaigns who believed the HCSTC loans were unfair on the poor and who also believed that the market was not tightly regulated enough. It seemed to them that borrowers were vulnerable because there was no cap on the interest rates placed on HCTSC loans and because there was no cap on the size of penalty that could be levied against borrowers if they fell behind on repayments.
In 2016, the rules were changed. The regulation that HCSTC lenders had to follow were tightened meaning that borrowers would be charged:
- no more than 80p per day in interest for every £100 borrowed,
- no more than £15 if they defaulted on their loans by missing a repayment, and
- no more than the value of the loan they took out in interest charges and any other type of fees over the lifetime of the loans.
In addition, lenders would not be allowed to collect repayment from a borrower’s account more than twice – for any subsequent attempts after that, they would have to get written or verbal permission from the borrower.
There were lots of new rules that all lenders had to follow and they worked. In the words of the FCA from January 2019, “the costs of borrowing are lower than before the price-cap and have been stable since – on average, borrowers are due to repay 1.65 times the amount they borrow.”
Short term instalment loans UK
At the same time, payday lenders were starting to increase the range of products they offered borrowers. Many noticed that paying the loan and the interest back all at once was creating some financial difficulties for a subset of borrowers so they decided to offer HCSTC loans as an alternative.
With these short-term loans, borrowers could ask for more money and they would have up to 12 months to pay their lender back. This meant that the amount coming out of their account on every repayment was significantly lower than having to pay it all back at once. However, the major disadvantage to this type of loan was that the borrower would have to pay more back in interest that they would with a payday loan.
Bad credit payday loan online in London
The payday loan industry was founded and it grew during a period of financial turmoil for the UK and the world. In 2008-2009, there was a global financial crisis which knocked the world economy arguably more than the Great Depression did during the 1930s. In fact, did you know that the shrinkage of the British economy was larger following the 2008-2009 crisis than it was during the Great Depression?
It’s only recently started to change but, for many years following the financial crisis, the rate of inflation was higher than the increase in people’s pay salaries. That meant that, for many years, people were essentially taking an annual pay cut. Because real wages were going down, it became harder and harder for many individuals and families to avoid occasionally missing payments on credit cards, loans, mortgages, and utility bills.
When someone misses a payment or when someone takes out a loan and they can’t afford to repay it, this will show on their credit file reducing the credit score on which many traditional lenders make their judgement on whether to say “yes” to a borrower wanting money.
Thankfully, many of the newly-launched payday loan companies and short-term loan companies were happy to lend to people whose credit history was not perfect – more on that later in this article.
No credit check payday loan – do they exist?
One of the most popular web searches for people wanting a payday loan is “no credit check payday loan”. No credit check payday loans don’t exist – as part of the big shake-up by the FCA a few years ago, every lender must perform an affordability check on borrowers to evaluate whether a borrower can meet their repayment on time and in full.
Part of that affordability check is to perform a full credit search – all FCA-licensed lenders and brokers, like 786 Loans, must perform a full credit search. There is no such thing as no credit check payday loans except those offered by loan sharks.
Payday loan market after the big FCA changes
Although over 5,000,000 payday loans and short-term loans are taken out every year, the sector only accounts for 10p in every £100 of loans outstanding in the UK. Since the rules were changed:
- the number of borrowers in default have fallen substantially
- volumes of loans (the number of loans made) have also fallen
- lenders are promoting short-term loans more than payday loans to allow them to make more in interest for every loan made.
What’s the extra value offered by using a payday loan broker?
The HCSTC market has changed for the better from the perspective of borrowers. You’re paying a lot less than you did before, you’re getting longer to pay loans back (although you pay more interest), and you’re better protected if your account falls into default.
There is still healthy competition between lenders in the payday loan sector and the best way to get the cheapest deal for yourself is to apply for a loan whose “borrower profile” your situation is closest to. A borrower profile is what each lender on our panel sends us about the characteristics of their ideal borrower. When we have the details you give to us on the application form, our clever computer system then matches you with the lender or lenders whose borrower profile looks like your personal and financial situation the most.
Normally, with seconds, a lender or lenders will make an offer, the most attractive of which we’ll present to you for your approval. If you are happy with the rate and with the terms and conditions, sign the online agreement form. Depending on the speed of your lender and your bank’s systems, your money could be with you within the hour.
Although we don’t lend any money ourselves, the lenders we work to are all FCA-licensed and they all operate to the very highest standards. Our service is free of charge (always!) and there’s no obligation on you to take the loan we present to you.
To start your application, please click here.