Sep 28

The changing face of payday lending in 2018

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Payday loans have evolved a lot since they were first introduced to the market as an initial short term finance concept and utilised in the USA, and then having been introduced to the UK market with large payday brands. Initially, there were a number of unscrupulous and dishonest lenders who, without any overarching regulations in place, were able to charge sometimes unsuspecting customers thousands of pounds in interest and late payment fees if they missed any payments.

However, with customers and borrowers sometimes being charged potentially thousands of percent in interest payments on direct lenders alone, many people aired their grievances to the Financial Conduct Authority (FCA), the UK’s financial regulator.

In April 2014, the FCA introduced a range of sweeping legislation which, designed to shake up the industry and bring things into check, ensured the unscrupulous lenders were unable to operate any further. This legislation also introduced laws whereby customers can never be charged more than double their initial loan amount and ensured that daily interest rates on loans were capped (at 0.7%).

Since their introduction to the UK market and the FCA’s regulation of these loan products though, what a payday loan actually is as well as viable alternatives have evolved and adapted to the market, customer requirements and regulations.


How Do Payday Loans Work?

Generally, payday loans are designed for people who need quick and instant cash to cover immediate needs. For example, many payday customers may have an emergency they cannot pay for in the immediate term. It may be that someone’s car or boiler breaks down, leaving them in a potentially difficult position, as waiting until payday, likely to be at the end of a calendar month, may not be an option (as in the case of a broken-down car or boiler which would be a necessity for day to day life.)

The basic premise of a payday loan is that the borrower requests a loan amount, usually up to around £2,000, on an unsecured basis. The borrower will need to state their preferred repayment date, which tends to be within a few days of their payday from their place of employment.

The lender will then inform the borrower how much the loan, taking interest into account, will cost and, subject to some credit and affordability checks, the money is funded often within a matter of hours or even minutes to a nominated account.

Once the loan is provided, the interest ‘clock’ starts ticking and the borrower has until payday to clear the loan plus capital [the total debt]. At the end of the term, the borrower makes a single repayment, covering all charges and the total loan, clearing their account with the lender.


Modern Day Payday Loans

With increasing demand for easier and more affordable repayment terms for borrowers, the vast majority of payday lenders have adapted their lending and repayment processes. Nowadays, most lenders will ask the borrower to select how much they want to borrow and over how long; potentially up to 6 months. This ‘installment’ model allows borrowers to spread the cost of their loan and the associated interest more affordably.

Traditional payday loans are now routinely referred to as ’30 day loans’ or ‘1 month loans,’ with the traditional payday approach seen as simply a shorter term loan than others. There has therefore been somewhat of an amalgamation of installment and payday loans over the years.

Furthermore, by allowing borrowers to spread their costs in this way, the risk is often reduced for lenders. More people are able to afford a lower, more consistent repayment amount, than a single, potentially large payment in one go. This in turn means that by adapting this model, lenders are often more likely to receive their repayments and interest, as opposed to having borrowers potentially default and miss repayments.


Specific Short Term Loan Options

With more competition in the payday and short term loan market than ever before, and with borrowers looking for loans for specific needs, it is no surprise that there have emerged a number of additional lending products, tailored for specific purposes, needs and requirements.

Similar to how the concept of a second charge mortgage emerged from particular needs not always being met by first charge mortgages, various short term loans have been born out of the need for there to be specific loans for specific customers.

Emergency Loans – These are designed to be funded upon approval. Where a payday or other loan may be funded in a few hours, or simply on the same day, an emergency loan is designed to be funded within minutes once approved. In practice, this means that the borrower can utilise the money straight away when something such as a leaky roof, broken down car, broken boiler or otherwise unexpectedly occurs.

60 and 90 Day Loans – Increasingly popular are loans in which the borrower repays in a pre-agreed period, but over a few months. A hybrid between a traditional payday product and newer installment types, these loans provide a slightly more rigid agreement for the borrower to stick to, but it means they can clear their debt in their own time.

Logbook Loans – Although a secured loan, logbook loan customers may in other cases potentially look at an unsecured loan. However, a logbook loan may provide more than an unsecured equivalent. Secured against a vehicle, using the V5 Ownership document, the ‘logbook’ as security for the loan, these loans could lend as much as £50,000 depending on the overall resale value of the vehicle in question. Lenders will usually have a maximum percentage of the value which they will be willing to lend in each case, dependent on the value of the vehicle used as collateral.


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