The Financial Conduct Authority (FCA) made some sweeping changes to the payday loan lending market, and as a result many lenders went bust or voluntarily left the sector. In the end it has led to a significant improvement in the processes behind the application browser for a potential borrower and has ensured that there are now greater levels of transparency and customer service in the industry. This can only be a good thing for the consumer in a sector that was fraught with problems for many years – including the worry of countless borrowers living with unmanageable debt that started with high interest short-term loans.
The biggest impact that came from the FCA changes to the payday loan sector was that the market itself has shrunk dramatically. There are far fewer lenders in the marketplace today, especially physical payday loan direct lenders with stores on the high street. The regulation changes looked at cost caps, as there was no desire to put a stop to payday loans altogether. There is still a viable market there with consumers who genuinely benefit from a short-term loan. Transparency was a buzz word that needed to be adhered to however, with consumers given much more information upfront and no hidden costs. There was also a change in approach in terms of debt advice and what should be done by payday loan companies should borrowers come to them with payment problems due to unforeseen circumstances after taking a loan out.
One of the reasons that so many payday loan companies left the market entirely after the regulation changes was that there was a significant drop in revenue because of the cost caps, and with expenses remaining at a similar level profits would drop dramatically as a result. This hit physical stores especially but has also helped with the rise of online payday loan companies with a simple and transparent approach to the application process. The online payday loan calculators and fee explanations are a direct result of the FCA regulatory changes and have increased customer service levels to unseen heights prior to the changes in the market.
The highest amount that lenders were earning on every £100 borrowed pre-changes was £39 per month, whereas the changes have put a cap on this at £24. This makes a significant difference to the borrower, but has obviously impacted many lenders too. There was also a change in default fees, which are now capped at £15, as opposed to the £20 or over that were commonplace in the sector previously.
Payday loan companies now have to think in a different way and that is where the new breed of responsible lenders have entered the short-term loan marketplace. Offering customers a better standard of service from day one is now paramount, as is being as transparent as possible about the application process and the exact interest fees and potential penalty fees. Consumers respond well to this approach, and with fast online application processes that can deliver you your funds direct to your bank account within hours of the application being made, the standards have certainly improved significantly.