Five reasons why capping charges on payday loans may not be a good idea after all

Capping charges on payday loans may not be a good idea after all

Payday lenders have now been regulated, capped and put right in their place. Everyone should be happy from Mr. Milliband to the Archbishop of Canterbury Justin Welby. We should all be able to relax as the dust settle after the insane battle against payday that has been going on for the last ten years.  The cap is on. The payday lenders are regulated. Credit checks must be performed, rollovers are restricted, interest rates must bend to readjustment, and payday lenders have become another financial institution. It seems that it is agreed that we are all happy with the outcome of the years of mud slinging. The only problem is that there are some points to consider that might make this regulation more costly than beneficial. Here are some reasons why:

·      When Payday lenders could charge higher fees and interest, it allowed them to lend to high-risk customers. Payday lenders take on a big risk with short-term credit and short term loans. By lending to individuals that are likely to default, the lenders do not have the usual turnover that can cover the costs of the risk. The Financial Consumer Authority (FCA) estimates that approximately 160,000 people who would previously be able to take out a payday loan would now no longer be eligible. Another 210,000 will not be able to borrow as much as they did before.

Payday loan sharks

·      The sharks will begin to circle. People will begin to start making deals with ‘Jaws’, and end up as fish food. The FCA admits that there is inconclusive evidence on loan sharks and how many customers would approach them if turned down by a Payday lender. Another point to consider that many people would turn to an overdraft which can be just as expensive as a Payday loan in the long run.

·      As we are already experiencing, lenders are simply going out of business. According to the FCA’s research, 10 Payday lenders out of 400 account for approximately 80 percent of the industry. A 43 percent total drop in revenue across the board, the FCA goes so far as to say that only the largest 3 to 5 Payday lenders are likely to survive. Logically the companies that do survive will probably not compete because of the nature of the cap. However, with the advent of the new comparison website, the FCA does not expect much change in the competition levels.

·      Then the question is, is all this regulation necessary? It is indisputable that the economy is slowly rising out of the mire and with it recovery that leads to a decrease in people needing to borrow. As the UK becomes more affluent, Payday lenders will fall into their rightful place in the scheme of things