As of January this year, the UK has seen an enforced cap on payday loans. What was once an APRs of 4,000% has now been reduced to 1,200%. This seems like a lot but in the end if you take out a loan of 200 pounds you will only be paying 1 pound less than before.
This is all well and good but from the experience from our friends across the pond, the Americans, the more they enforce rules and regulations, the more the business goes rogue online and it is almost impossible to catch the unlicensed lenders (better known as online loan sharks) once they have entered the virtual world. They are simply too good at covering their tracks.
Even in the UK, the Finance Conduct Authority (FCA) understands that the price caps will make many people’s accesses finances even more difficult and that finding an innovative replacement for payday lending should be at the top of the list. The demand for credit has not diminished, and when payday companies are restricted in this way, they then have to rethink their business strategy.
Are credit unions, banks, building societies, and microfinance organisations an innovative replacement for payday loans?
The Church of England tried very hard in the last few years to offer a service that would compete with the payday industry and failed. Approximately 80% of the payday market can now be found online. The biggest problem that is faced is that after lofty promises, the credit unions and microfinance institutions are not delivering the innovative replacement for payday that they had promised, leaving a huge sector of the population back at square one – at the doors of the payday lenders.
To date the London Mutual credit union is the only credit union that can offer anything near a payday loan. In fact, their offering comes in lower than what a payday loan would cost. They do have a big problem though, in that each loan causes a loss to the union unless those taking out the loan actually become a saver and long term member of the credit union. It is only at this point that the credit union can cover its costs. Currently, most credit unions are focusing on the 40 million pound government funded project that aims to help these institutions offer broader services. It is projected that credit unions will soon be able to offer mortgages, reduce costs, and attract borrowers that are more affluent. Not only that, but in order to compete with payday lenders it is imperative that credit unions become more automated
The FCA offers a solution for an innovative replacement for payday loans
While the FCA has been working so diligently to get that cap onto the payday lenders, The FCA is working with other government authorities to stop this insanity and gross abuse of the poor, hard-working, UK citizens who have no money. While the Ombudsman, the CMA, and the FCA have maintained all along that if there were no payday, there would be no poverty. The FCA has this suggestion for those in desperate need:
It hopes that many will be able to count on friends and family to help out.
Hey, FCA – what happens when they are broke too?