Why The Short Term Loans Market Should be Regulated?

No one likes being told what to do! Whether it be not to exceed the speed limit, not to drink too much or regulation governing how to run a business.

If you ask many people involved in regulated businesses most of them would say that they would rather not be regulated at all. This is not just true in the finance sector but probably across many industries.

I would also suggest that those who are operating in a way that is either outside or close to the limits of the current regulation would often be the ones with the most opinions about this.

I have worked most of my life within regulated businesses, these have included Aviation, Claims Management and now the Short Term Loans industry. I was working in claims management at the point where regulation came into force for this industry so have both experience of the before and after. Before we discuss why the short terms loans markets should be regulated, I think we can draw a lot from this.

Prior to regulation anyone could set up as a claims management company. There was no requirement to have the skills to do the job, no standards that must be met and the protection for the consumer was left to the mercy of the standard UK legal instruments (E.g. Distance Selling Regulations, and standard consumer protections). While these regulations have their place, they are not detailed enough to afford adequate protection in specific industries.

The industry became swamped with claims management businesses, some did a very honest and professional job while others simply bound the customer into a legal contract, did a very shoddy job, and took their cut at the end. In the end there were only 2 groups who suffered. The consumers, as they had no way of knowing who was good and who were the cowboys, and the reputable and honest companies who could not compete with them. In addition to this the industry got a bad name, and like many things in life even the good players were tarred with the same brush.

After regulation the industry was cleaned up dramatically. The cost of regulation meant only those who were serious would pay, the regulation required ALL players to be open, reasonable and honest with the customers and the work had to be done in a professional way. In return for this the business benefited from a reduction in competition, would not suffer by ‘doing it right’ and would benefit from the industry losing its bad reputation.

The short term loans market is not dissimilar to claims management, except that the regulation has already been around for many years. For regulation to be effective it must:

  1. Protect the genuine customers
  2. Not  allow those customers who are trying to defraud a place to hide behind
  3. Be enforced properly to create a fair playing field for those who do comply

Without regulation the it would be a mess, loan sharks would be rife, lending to people who couldn’t afford it, charging interest at rates that make the 2000% – 4000% on a payday loan look small, not making sure customers fully understand the product and then when they do not pay it would be debt collection with the aid of such mechanism as the baseball bat or broken limb persuasion. So while deregulation is a definite no, the next question is whether the current regulation is enough.

Payday loans companies have more than their fair share of critics. The media and politicians, even the Church has something negative to say about them.

While the Payday Loan (and we will include instalment loans in this definition) is an expensive product compared to a high street bank loans or mainstream credit cards, the people that take payday loans are unlikely to be able to access such credit. The rates have to be high to reflect the risk associated with these borrowers, otherwise the lenders would not be able to survive. For these customers the payday loan is a life saver.

The problem with Payday Loans is those lenders operating on the very edge of current regulation (or in some case just over the edge) and are causing the customer genuine detriment.

The biggest problem is unaffordable loans. There are many companies that will not complete adequate affordability checks and then force the customer into and endless stream of rollovers. For the lender this is great as they get month on month of interest and still claim the capital, whereas the borrower has no choice but to pay or go into debt.

So other than the rollovers, why would the lender make a loan that is unaffordable? Some lenders will work on the principle that if their debt collection action tough enough, then when you don’t pay they use heavy tactics to extract their money.

So how could regulation go wrong?

There are two ways that regulation can go wrong, and these are controllable by the regulators themselves. Firstly, the protection that needs to be given to genuine borrowers must be ring fenced so that it doesn’t afford unjustified protection to those who are trying to defraud. An example of this would be insisting that forbearance is given to the ‘won’t pays’ and not just the “can’t pays”.

The second is not enforcing each and every rule unilaterally. Whatever rule is in place must be enforced. Otherwise there is a risk that those who do immediately adhere 100% with the regulation will be at a disadvantage to those who don’t. Most people will accept restrictions and costs if the regulations require if they can see that everyone is in the same situation.

In conclusion the short term loans market MUST be regulated, and the regulations must be adequate to ensure that the customers are fully protected, but they must also allow lenders to recover funds from those deliberately avoiding the debt assure that they are enforced.

In April 2014 the Financial Conduct Authority will take over regulation of Consumer Credit, and long with this comes many new rules. Some will be good for the lenders and others may cause harm to their profits, but the proof of whether they are the right regulation will be if they facilitate the creation of better product that change the view that many have of Payday Loans.

About the author:

Simon Hatch is the co-founder and Director responsible for Compliance, Risk and IT, at True Blue Loans (www.trueblueloans.co.uk) a company offering instalment loans over 3, 6 or 9 months, with fixed repayments and no fees, just daily interest.


PayDay Lenders – When You Don’t Repay Your Debt

Due to the rapid expansion in the short term lending market of PayDay Lenders there is now also an ever expanding debt directly associated with this market. Due to the fact the product offered by PayDay is very limited in terms of its repayment options it becomes easy for a consumer to reach a point where repayment just cannot be made. To clarify the repayment options are simple, either repayment the entire balance on your next pay day, consisting of the amount you borrowed and the interest applicable; likely to be say, £30.00 for every £100.00 borrowed OR choose to simply repay this interest sum extending the full repayment (again including additional interest) until your subsequent pay date. The first of these options requires a large lump sum from the consumer and the second does not actually reduce the debt in any form.

It is therefore little wonder that consumers have found themselves in a position where on a regular monthly basis they are either repaying the interest over and over, achieving nothing; apart from to avoid falling into default or worse still keep borrowing. Some consumers are known to have a large number of pay day loans running all at the same time, the true reasons for this of course does vary but it is fair to say many are borrowing from Peter to pay Paul.

The difficulty PayDay Lenders then face is when repayment isn’t made, how to successfully collect the funds borrowed in a manner which is fair to all. Often due to the nature of these loans when a consumer doesn’t make repayment it can sometimes be assumed that they have the right to avoid the collectors and ultimately try to escape the debt. Obviously there are circumstances where this happens as a result of genuine reasons or financial difficulty but ultimately the advice looking to be offered today is the same.

By avoiding debt creditors will come to one conclusion and that is that you have no intention to make repayment. A creditor will make attempts to communicate with a debtor through as many means as possible, this includes calls, texts, emails and letters typically. This is by no means to say a consumer will be bombarded; instead the creditor wants to ensure they are satisfied they have made adequate attempts to make the debtor aware a repayment has been missed. So in instances where these attempts fail as I have said, creditors will assume the intention is gone.

If a debtor allows an overdue account to reach this point the situation is pretty serious. Most PayDay Lenders use external Collection Agencies to help recover monies owed, this can increase the amount owing and have a negative effect on credit ratings. Equally other lenders may choose to address the debt through the County Courts. Either way this could all be avoided by communicating with creditors, explaining changes in circumstances and making realistic proposals for repayment. At the end of the day a PayDay lender does not want to take further action against a debtor and would rather maintain the channels of communication in a mutually acceptable manner. So in short, don’t avoid debts, there is another way.

Instalment Loans are a Better Alternative to Payday Loans

If you’re interested in taking out a loan, you may not be aware of the nuances between instalment loans and payday loans. You may have a hard time figuring out the benefits of one over the other, as the details themselves can be quite confusing. Many sources of information will tout one kind of loan over the other to get you to switch, but, the instalment loan is a much better alternative to paying off your debts than payday loans.

Payday Loans

Payday loans are relatively new, and allow even those with bad or no credit to apply for them. What is required is that the borrower must have a bank account, employment and a minimum monthly income that is dictated by the guidelines of each individual lender. The loan itself is secured by the paychecks of the borrower; a check is written to the lender consisting of the borrowed amount plus any fees that are associated with the loan. The interest rate on payday loans is typically high, but allows the borrower to have access to quick cash without the worry of being denied because of bad credit.

Instalment Loans

Instalment Loans

Instalment Loans

Instalment loans have been around for a much longer period of time and are the most popular form of loan on the market. Larger sums of money are typically granted through these loans, making them more attractive to suffice the satisfaction of bills and larger debts. The payment of these loans allow the borrower to pay off the debt within a much larger space of time, creating 3 or 6 month loans; some of them can take even up to a year to repay.

Why Instalment Loans are better

Some people would think that having less time to pay off a loan is certainly more attractive as it gets rid of the debt much more quickly. However, there are many advantages to choosing an instalment loan over a payday loan. First, the timely payments of installation loans can actually improve one’s credit rating, making the prospects of a loan in the future more viable. Secondly, the interest rates on instalment loans are much lower than those of payday loans. It may feel like you’re paying a lot more money, but with lower interest rates, you’re actually saving more than you realize. Typically, a borrower may end up paying ten times as much on the principle in a payday loan than if he were to take out an instalment loan instead. Thirdly, the rate being paid can be changed every month, according to the fluctuation in income that a borrower might be experiencing. Fourthly, payday loans are not concerned with your financial matters; what you borrow is what you pay back, and you have to do so within the time period by your next pay check. Instalment loans, especially 6 month loans, allow the borrower to plan ahead, should he suffer a financial crisis that renders him unable to pay the set amount every month.

Depending on your needs, instalment loans are certainly a more attractive option for borrowers than payday loans. It may take you much longer to pay off the overall debt, but the benefits to your bank account will be felt once the debt has been paid off.