Consumers that live on a low income as well as the vulnerable are benefiting from the payday loan regulations that were created by the Financial Conduct Authority (FCA). Since the rules were put into place back in 2014, it is estimated that borrowers are saving about £150 million per year in the form of lower interest rates, reduced fees, caps, and other regulations. Now the FCA watchdog agency has agreed to extend the caps until 2020, and which time an additional review will take place.
The savings are also being experienced by hundreds of thousands of borrowers, many of them who live cheque to cheque. Since the payday loan regulations are helping over 700,000 borrowers save money, this is a huge benefit for the entire UK economy. More money in a families pocket allows people to spend it on basics such as food, rent, and other bills.
Since the FCA rules took effect in 2015, the cost of each payday loan originated has fallen about 40%, to a more reasonable £60 per approved application. Now multiply the saving per loan (of around £40) times the hundreds of thousands of borrowers who borrow money from payday lenders each year, and the Financial Conduct Authority regulations as well as those from the Office of Fair Trading quickly add up to major savings.
The main reason the costs have gone down to borrowers has to do with interest rates. Prior to regulations from the FCA, some payday lenders were charging APR of up to 5,000%. Now the rates have been brought way down to a more manageable interest rate of 0.8%, which is compounded daily. This not only saves the borrowers money, but also causes payday lenders to be more cautious in who they issue a loan to. This is also show by the fact that over 1000 companies have gone out of business.
Additional good news is that the savings should be able to be extended until 2020. This is the result of the Financial Conduct Authority deciding to reassess the rules in that year, and all the regulations will stay effective until then. So consumers should be able to save tens of millions more pounds from 2017 until 2020, which is good news for families as well as the UK.
Based on the last 3 years of results, in which £150 million was saved, it is likely that a similar amount of money will be saved by the vulnerable from now until 2020. This will also continue to help reduce other financial hardships that households may be threatened with.
There is another improvement that is going to be made as well, which should also provide assistance to payday loan borrowers. The Financial Conduct Authority is assessing, and will be drafting, new regulations on both payday loan affordability as well as new rules around applicant creditworthiness.
While there were improvements made to these issues going back to 2014, another assessment will be taking place too. The aim is to continue to ensure that lenders are only issuing loans to borrowers that have the ability to repay the money over time. As by issuing funds to individuals with poor credit ratings, this can increase the number of households threatened with debt arrears and even bankruptcy.