The concept of short-term lending and borrowing has been around for centuries now. Traces of such practices can be seen since the 5th century AD. Various methods of lending were introduced and washed away with the passage of time. The lending process became more governed and structured with its age, while the people in the 1920s found it uneasy to seek loans, things were different in the second half of this century.
After decades of strict regulations, Margaret Thatcher’s government eased up the banking system and reduced the restrictions imposed on the financial services in 1979. Banking and borrowing became more acceptable to the masses. People understood the uses and advantages of these customs and utilities properly, and it wasn’t long when people became acclimatized to the concept of borrowing.
But some of us used it wisely, some used it in another way, and the rest of us, we just spent it otherwise.
In the last decade of the 20th century, the unsecured credit industry was just starting to spread its wings, but the concept was still new to the masses.
Such a thing was useful to the people struggling for a loan conventionally. And by the end of the 1990s, the citizens of Britain were more comfortable with the new-born concept of Payday loans altogether.
Payday loans were now accessible to the consumers with incredibly easy options and many of us moved ahead to it.
But a few events in the course of time are capable of bringing about huge temperamental changes in the system. By the end of 2012, lenders began to develop a bad reputation among its customers. Risks related to such things were more visual and understood by the authorities. Many Payday lenders became well known in the media for all the wrong reasons.
It was a market that was loosely regulated, but things change with the time and efforts being put into it.
In 2013, it was seen that the regulations on such loans were not strict enough. So the office for fair trading ordered the Payday lenders to clean up their businesses and the newly created Financial Conduct Authority (Established in 1997) took over the charge for regulating these things.
For the first time, a detailed inspection of these loans was conducted. All the lenders (including the ones who were authorised by the FCA’s predecessor) were enforced with re-authorisation. This review looked upon the lenders on an individual scale. They checked if these lenders adhered to the new and strict regulations in the process. Some faced rejections and some left the market altogether. These lenders were unable to adapt to new changes and regulations.
In January 2015, to protect the consumers from the variable consequences of a Payday loan, the FCA imposed capping mechanisms and regulations on the total costs of such things. The regulations were now tighter and stricter than ever. The major elements are stated below:
Many lenders had to pay out compensations for bad and poorly assessed loans provided to the consumers.
FCA asked lenders to write off a huge number of debts, which were badly assessed for consumer affordability.
A capping of 0.8% per day on the interest rates and a default fee, not more than 15 Pounds was introduced as a regulation.
Further, the FCA introduced a forum called the Financial Services Register, which listed all the authorised lenders and loan providers. This register proved to be helpful to the consumers who were now sceptical about unregulated loan sharks and unethical entities of Payday. The consumers could now choose from a list of regulated lenders and the process seemed more easy and secure to them.
A payday giant Wonga came crashing down on the knees in the later stages. There was a surge in customer compensation claims and PPI’s (payment protection Insurance) against it. Causing more damage to the business model of Wonga than anything else. FCA prompted Andy Haste, Chairperson, Wonga, to write off 220Mn Pounds worth of debts and interest for about 3,30,000 Customers.
According to the figures from Financial Ombudsman, the complaints against Wonga increased up to 2,347 in the latter half of 2017 from mere 269 in 2015. The numbers spoke for themselves, in the past 5 years more than half of the Payday customers faced debt issues. 1/3rd of them incurred a bad credit score due to it and another 1/3rd had to make arrangements with the creditors. Many of them were issued CCJs (County Court Judgements) and some of them were even visited by the debt collectors as well.
According to the FCA, 4.1Mn people in the UK are facing serious financial difficulty, and a major portion of it is credited upon the Payday loans.
Reports stated that a Payday loan only worsens your financial concern. Applying for it damages your credit score and its proper usage does not improve it any further.
Child poverty reached a record high of 30% due to Payday loans since 2010.
So, the Payday lending culture saw its share of turbulence in the course. It reached the heights of success, the masses moved towards it and then the issues pertaining to it became visual to us. The Payday industry went unchecked for a long time and hence it was misused by many. The utility became a headache for the consumers and the lenders paid out loans with least assessments and planning.
A wise man once said: excess of anything is bad. The saying fits right in the core of the Payday issue. A utility that proved its worth to the masses, when misused and overused widely, caused more damage than helping the general well-being of its customers. An irresponsible lending and borrowing culture led to the downfall of it. The future of it is still full of uncertainties and vague conceptions about it.