Short Term Loans are advanced for a minimum period of ten days to six months or a couple of years or more. Pay day loans are a special type of Short term Loans which are given for a short period of time which is generally till one gets his/her pay. They are typically loans of up to 500 pounds to be repaid before the next ”pay day”. Typically, a loan of 100 pounds would cost 25 pounds every month. The annual percentage rate (APR) for such loans can be 1000% or more! APR expresses this cost of a loan on a yearly basis, rather than monthly which is what it is actually charged at. The APR is the standard for disclosing the cost of the borrowing, making it easy to make comparisons across lenders. Also, this disclosure is for the protection of the consumer.
There are no restrictions imposed on the interest the lenders can charge. Pay day loans are very popular in the United Kingdom. Customers typically take out 6 such loans every year for amounts between 100 and 1000 pounds, with interest rates above 5000% APR. The pay day loan industry is worth about 2.8 billion pounds today. As such, the financial regulatory body in the UK, the Financial Conduct Authority (FCA) has formulated new rules for the industry, to protect the interests of borrowers.
Why do people take pay day loans?
· To meet any unexpected bill
· To pay for repairs to house or car
· To tide over the end of the month till the next pay day
· To avoid borrowing money from their friends and relatives
· To continue with their scheduled expenses as they can’t afford to cut on the expenses
· To meet an unexpected huge expense like huge car repair bill or roof collapse which has to be repaired on an urgent basis
· To meet some medical emergency or hospitalization
· To meet financial expenses if there is a death in the family
· Any other emergency needing immediate finance which is not available to the people
What do pay day loan lenders have to offer?
· Flexibility of repayment as in case of non payment the loan can be rolled over
· Ease of application and disbursement of loan – turnaround time is 24 hours
· Bypassing traditional credit checking
What happens if you don’t repay the loan on time?
It is either rolled over by which you pay a fee to delay the repayment. This works out to quite a lot depending on the number of times it is rolled over. Or, through the Continuous Payment Authority, the lender could automatically take the loan and interest amount directly from your bank account.
New Rules for pay day lenders:
· Lenders will be forced to make more intensive affordability checks. The City regulator as the FCA is known can crack down any time on lenders and stop them from giving loans. Registration with the Office of Fair Trading is mandatory for lenders
· New rules to protect borrowers have been designed so that only those who can afford to repay the loan will be granted one
· Big lenders have been reprimanded for charging high APRs
· APRs have to be communicated clearly to the borrower
· FCA took over the regulation of all pay day loans in April 2014, with restrictions in place since July 2015
· No more than two rollovers are allowed.
· Their status of preferred creditors has been removed.
· They are bound to offer free debt advice to a borrower who has to roll over a loan.
· The government should provide comparisons among different lender in the consumer’s interests.