FCA rules leading to changes from payday lenders

In a victory for consumers and families across the UK, payday lenders, including Wonga, are starting to offer more affordable short term loans to borrowers. Everything from fees due to borrow money to the maximum amount that needs to be repaid by the borrower are being reduced, and this will save families a significant amount of money over time.

Some of the people that may benefit the most from these new Financial Conduct Authority (FCA) regulation will be low income families and those in poverty, who have turned to payday lenders in the past. Many of these households are cash-strapped and struggle to pay their bills on time. Not only will it be more affordable to them, but the new changes going into effect next year will also make it easier for consumers to understand the fees due, and thereby reduce scams that occur in the industry.

The new FCA rules go into effect on January 2, and one of the main benefits is that daily charges will not exceed 0.8 per cent of the loan amount. Another one of the big changes is that any default charges can’t go over £15. Also, consumers will never need to pay back more than what they have borrower.

Impact of new lower fees and costs

The lower interest rates and fees will benefit thousands of UK families. It will results in a significant savings for consumers, which will free up their income for other bills and basic needs.

However, some experts that that these new Financial Conduct Authority rules will cause many payday lenders to go out of business. While some of the largest companies, such as Wonga, Mr Lender and Elevate UK, should survive the shake-out, hundreds of smaller companies may fold. It is estimated that as many as 400 companies may start to go out of business in 2015.

So if companies go out of business, one downside to these regulations is more people may be denied a loan. When this occurs, people can’t turn to some other predatory lender or loan shark, as the borrower will just get into trouble again. The bad news is that those loan sharks are not regulated by the FCA, and those companies may still overcharge households.

As many as 10 per cent of applicants may be denied a short term loan. If this occurs, contact other not-for-profits such as Citizens Advice or even a local council for referrals. While these organisations will not be able to provide money, they can give families free advice on options available to them for addressing their financial hardship.

Also, some banks may start to soon issue funds to lower income families with good credit as a result of these changes. They are working with the FCA and the UK government to try to provide more sources of funds to cash-strapped people. While this will never replace the payday loan industry, it may someday provide an alternative.