Marcus RichardsBefore 2014, the payday loan sector was positively booming. Borrowers could walk into a lending office or apply online at one of the hundreds of websites offering credit and receive a nearly instantaneous loan, due for repayment normally at month-end when their pay check arrived, hence the name.
This type of borrowing became particularly prevalent during the 2008 financial crisis when banks imposed tighter eligibility criteria and in some cases withdrew products from the market entirely. Previously accessible products such as overdrafts were removed – leaving low-income earners with nowhere to turn.
However, issues quickly emerged due to subprime lending, a lack of credit assessments, and spiralling debts, where millions could not keep pace with ever-increasing interest and late payment charges, causing regulators to turn their attention to payday lending.
The End of the Payday Loan Era
The Financial Conduct Authority, the financial sector regulator in the UK, imposed a series of regulatory changes in 2014, creating new rules and caps on how ‘payday loan’ providers operated.
Reforms included mandatory affordability checks to avoid lending to those already in financial crisis, requirements for lenders to direct borrowers to debt advisory bodies, and thresholds on the interest charges or late payment fees lenders could levy.
Credit providers could charge up to 0.8% interest per day and could never increase the overall debt to more than twice the initial loan value.
The outcomes were largely positive, with data collated by Citizens Advice showing that reported issues with repaying payday loans halved within one year.
For the original payday lenders, this meant either improving their products, services and offerings or backing out of the market entirely. Many firms that had launched solely based on payday lending products went out of business without any attempt to adapt to evolving regulations and improve the consumer protections on offer.
Additionally many lenders were subject to retro-active claims from customers seeking to have their loans written off as the lending terms of the original loan were now outside the scope of the newly implemented regulations.
What Are the Alternatives to a Payday Loan?
While specialist payday lenders were in the spotlight, regulatory reforms impacted every financial lender to some extent. Conventional banks were not exempt, and many also needed to update their interest rate charges and fees related to late payments.
Traditional lenders had not always provided debt management advice or may have routinely rejected any applicant with a history of payday loans.
The demand for short-term lending, with flexibility and reasonable repayment terms, remained, with some banks developing new personal loan products and others recommending arranged overdrafts. These options are preferable to credit cards in many ways, without the temptation to spend freely, accumulating higher interest rates in a similar way to the earlier payday loan structure.
Will Banks Replace the Payday Loan Sector?
Short-term loans offered by mainstream banks share some of the characteristics of the original payday loans but are safer and comply with stricter regulations around interest charges.
Many banks, though, do not offer these products, preferring to direct customers to overdrafts or personal loans with less flexible terms. Independent, regulated lenders remain a competitive alternative.
Wonga South Africa is one of the more dominant providers that still offer a version of payday loans online with short repayment terms from just four days, but with consumer protections and transparent guidance to help customers make informed financial decisions about which product is right for them.
In general the ‘new format’ for the online payday loan (as above with Wonga for example) typically manifests as a loan that now spans several months with smaller ‘instalment payments’ at the end of each month. These loans are offered off the back of rigorously strict risk assessment criteria in line with the newest regulatory reforms.
