Contrary to popular belief, Payday loans aren’t as new as most people would want to believe. The loans can be traced back to the 1990’s when unsecured credit started becoming increasingly available. The loans were incredibly attractive to individuals who struggled to secure traditional loans from banks.
Individuals with spending habits found it easy to borrow from payday loan lenders normalising trends such as buying on credit. Payday loans are largely responsible for making people “relaxed” about borrowing.
Although people found it difficult to open bank accounts and almost impossible to take loans in the 1920s, the 1990’s and 2000’s were very different. Payday loan lenders now offered borrowers a fast and easy option to get desired funds.
Internet penetration rates made it easier for the loans to become widespread. With safe online application processes, short-term online credit became a suitable option for many. Borrowers could receive cash in record time, often within minutes which made it possible for online lenders to compete effectively with established high street lenders.
Borrowers enjoyed the privacy offered by online loans, i.e. they were more discreet. The loans also had other notable benefits like; they could be applied from home or anywhere else as long as a person had access to the internet and a computing device.
During the 2000s the payday loan industry experienced a boom. Many people were using the loans, yet regulation was still lenient. Payday loan borrowers were taking loans on impulse. Industry players (lenders) were largely unchecked prompting irresponsible lending habits such as – offering loans without conducting affordability assessments. Lenders also started charging exorbitant interest rates and late fee payments among other charges.
Many lenders went as far as using unscrupulous debt collection mechanisms when dealing with borrowers who defaulted on their loans. Between years 2008 and 2012, the payday industry grew at a record pace. Consumers were turning to payday loans as the fastest and easiest credit option; however, most were facing difficulties during repayment.
According to CMA (Competition and Markets Authority) data, average payday loan debt stood at £1,200 despite lenders offering loans ranging from at £100 and £1,000 for every loan. A record 1.8 million Britons had payday loans in 2012. As the number of borrowers attempting to get out of debt increased and lenders increased the use of unscrupulous debt collection methods and extortionate fines and charges for late payments, they started developing a bad reputation.
2010 to 2015
Industry growth peaked in 2010 then began to shrink as many consumers lost trust in payday loan lenders. Risks associated with payday loans among other forms of short-term lending became more apparent, and many large lenders received a lot of negative publicity from 2010 onwards.
Since payday industry regulation wasn’t effective enough, the newly formed FCA took the mandate of cleaning up the payday industry. Regulation commenced in April 2014. The FCA took over from the Financial Service Authority.
The first course of action by the regulator was ensuring safe borrowing. All lenders including those who had been approved by the FCA’s predecessors had to undergo fresh re-authorisation. All payday lenders and brokers were looked into. Many lenders were denied authorisation because they didn’t meet the FCA’s strict standards. Most of these lenders who included large players then left the market.
Fully authorised lenders and brokers were placed in the FCA’s register where consumers got access in their quest to find trustworthy lenders to borrow from.
Tighter regulation forced many lenders to compensate consumers for past malpractices. In June 2014, the largest payday loan provider at the time – Wonga was forced to pay £2.6 million as compensation for past malpractices. Later that year (October 2014), 330,000 Wonga borrowers had their loans written off after Wonga was found guilty of performing inadequate affordability assessments.
In 2015, January, the FCA introduced a fee cap ensuring short term loan lenders never pay fees and costs exceeding the loan amount. The cap increased trust in the industry boosting popularity for payday loans once again. However, some lenders never survived the fee cap. Fast-forward today, the short-term loan problem has extended beyond short-term sources of debt like payday loans to overdrafts, credit cards, etc.
In the near future, the FCA could very well extend the payday cap to such forms of short-term credit believed to cause the current debt problem affecting British households.