Eight years ago, the Financial Conduct Authority updated payday lending regulations to add restrictions and conditions, enforcing a range of changes, such as:
- Implementing price caps on how much lenders can charge for short-term borrowing.
- Prohibiting unlimited rollovers on payday loans, which are often never repaid.
- Tightening requirements around affordability checks and financial assessments.
The aim was to prevent people from taking on spiralling debt without an end in sight and to stop predatory lenders from charging exorbitant interest rates, where vulnerable borrowers may have had little recourse to object to this, or find an alternative lender.
However, despite this reform and many comparable changes made by other national regulators around the world, quick loans and the prevalence of online borrowing with instant approval remain a concern.
What Difference Have Reforms Made to Vulnerable Credit Applicants?
The payday loan market has improved marginally, with measures such as price caps making it harder for lenders to market products with non-competitive interest rates. Many have adjusted borrowing terms by extending repayment periods, such as offering three-to-six-month short-term loans rather than 30-day payday loans.
Although this is a welcome improvement, a lack of financial literacy sometimes means a borrower does not understand the full repayable value, and this information is not displayed clearly enough.
Others may also continue to rely on multiple short-term loans to manage everyday living costs. Without lender intervention, there may be little to stop this habitual borrowing that can – if unchecked – have severe consequences.
The issue isn’t country-specific and seems to be an international problem. A US news report in September 2022 indicates that the payday loan market in North America makes up 40.5% of all worldwide quick loans, with over 20,000 registered short-term lenders, twice the number of Mcdonald’s outlets.
Young people are more likely to rely on payday loans, with a reported 40% of adults up to age 23 considering a short-term loan in 2018.
As lenders digitise products and market fast loans with high approval rates online and via social media, they are harnessing the attention of a new generation of borrowers, who may not have learned from past experiences about how payday borrowing can run out of control and cause long-term harm to credit ratings.
How to Reduce Credit Risk When Applying for a Quick Loan
Despite the positive nature of reforms, there are still considerable risks linked to quick loans, even where the lender carries out the legally obligated eligibility checks or implements maximum loan values based on affordability assessments.
However, established and reputable lenders are quick to identify those risks and ensure their customers are aware of them before they proceed. For example, the market-leading loan provider Wonga transparently addresses the credit scoring implications and risks of completing one of their quick loan applications. Importantly, some of these implications take effect even if you’re not actually approved for the loan.
Visit the link to their page above for a detailed breakdown of the damage different types of ‘soft’ and ‘hard’ credit checks can have on your credit score and future eligibility to apply for credit. All regulated lenders are legally obliged to inform potential customers of these risks yet some companies are more successful than others in how they present this information and communicate with their customers.
The advice for consumers is always to conduct their own research and only ever to approach trusted credit lenders and loan companies, ensuring they have all the information and guidance available to make confident decisions that support their long-term financial health. Be wary of any online loan process that seems ‘too good to be true’ and too eager to get your signature on the dotted line.