Payday loans are a very controversial product. With lenders charging around 1000% APR for these high cost loans, a number of people, including MPs and religious figures, would like to see these types of products completely obsolete. But following very strict regulation by the Financial Conduct Authority and a wave of compensation claims, this is starting to look more like a reality.
If we look back 10 years ago, the salary was at its peak. With the innovation of online loan application and processing, the industry has grown into huge feats, worth around £ 2bn per year in the UK at its peak. There were over 200 lenders in the UK, thousands of brokers and laws were broken like the Old West. Late fees, poor checks, spinning credit cycles and loose data, the market was weakly governed and hugely exploited by its stakeholders.
Go forward to 2015 and the introduction of FCA regulations came like a rush. Strict authorization laws, heavy controls and a price cap on daily fees saw the industry shrink almost overnight.
The next five years were spent by existing lenders trying to make the business model work, but many more fell apart or were administered. Additionally, it sparked a huge wave of compensation claims from former clients seeking repayments on past loans they couldn’t afford.
If you’ve struggled to repay your loan, you may be paid the full loan, interest, and compensation on time. The complaints rate was significant (over 66%) and this subsequently saw household names fall under administration including The Money Shop, Wonga.com and QuickQuid – paying over £ 600million in compensation to the elders clients.
If you take a look today, there are only a handful of payday lenders out there in the UK (under 40) – and that’s one more step towards obsolescence.
Dan Kettle, the founder of Pheabs, explained “The UK payday loan industry is certainly in decline, but making the product obsolete is probably not a good thing. There are around 3 million Brits who use payday loans every year as an anti-poverty measure, so removing this could be dangerous and play into the hands of pawn shops and loan sharks. ”
“It’s good to see a payday loan industry that is significantly cleaner and with better controls and more time to assess clients, the client is much better off, even if that means a large portion of applicants are refused. ” if you are interested in Oak Park Financial, you can find their website here.
“To become obsolete you may need to see real innovation in payday loan alternatives. Getting loans from credit unions is a good proposition, but being a nonprofit, there isn’t the scalability it needs to put your payday into bankruptcy. Certainly, we can look to the startup space, which is more likely to earn millions in investment to launch and scale a payday alternative – so this could be a space to watch.
“One of the most promising alternatives is payroll funding which allows employees to withdraw their pay earlier from work at no additional cost. It could be an exciting space.