How the FCA Changed Short Term Loans

There are a number of different ways for borrowing money as far as short term loans are concerned. These loans and the lenders who offer them have undergone massive transformations in recent years and are now the best version of themselves; compared to all offerings prior to today. Over the years it had become increasingly clear that short term loans, although fundamentally needed, the actual product had become dated and not able to effectively meet the real needs of the customer. This was evidenced when the FCA (Financial Conduct Authority) took control of the market a few years ago. Since their introduction the FCA has made it their mission to understand how the market place for short term loans and the lenders therewith had operated for years and in doing so establish rules for how improvements could be made.

Through extensive research the FCA discovered that for too long lenders of short term loans were not correctly established firstly, whether the loan was affordable to the applicant and secondly offering loans which were too restricted. The combination of these factors meant that too often customers were being granted loans which could not be repaid. This was further highlighted by how customers were using the product on offer. The product itself was known as the payday loan and as the name suggests, allowed customers the ability to borrow until the point of their next employment pay date. On this date the agreement was that the full loan amount plus the interest charged by the lender would be repaid as a single and one-off repayment. This was a simple manner of borrowing and the loan values were usually in the region of £100.00 to £300.00. The problem was of course, making these sizable and one-off repayments when the due date arrived. In instances where the customer was simply not able to afford to repay the lump sum the alternative offered was generally speaking, completely unsuitable. What the FCA concluded was that often consumers who could not afford to repay the lump sum as offered and agreed, they instead repaid what was known as an extension payment.

Short Term Loans

Short Term Loans

The extension payment allowed customers with existing loans to reduce the repayment due on the agreed date by paying only the interest currently due on the loan. This payment then meant the customer could extend the full repayment until their subsequent pay date. Although in principle the extension payment appeared to be a suitable alternative, the reality was very different. The fall in the extension payment was that although the repayment was fundamentally smaller, the reality was that doing so ended up costing the customer more. This was because the use of the extension meant that the account was then subject to another month’s interest and as such, the full amount due on the subsequent due date mirrored that of the original amount and therefore the amount owed had not be reduced at all. The fundamental nature of the pay day loan and the accompanying extension payment meant that often customers would get stuck in a cycle of never reducing what they owe, making interest based extension payment month after month, until a point at which the loan simply could not be repaid.

The FCA’s introduction as the governing body and their in-depth research of the month meant one thing; the end of the extension payment and increasingly the complete disappearance of the payday loan. Where the FCA agreed that short term loans could and did serve a purpose, the issue was clear; how loans were offered needed to change. As such nowadays the market for short term loans, under the guidance of the FCA, is a completely different place. Lenders of such loans are making lending decisions which the support of the FCA and their understanding of customer needs. Furthermore, if and when lenders are granting loans they are doing so in a more customer friendly way. This is thanks to the addition of installment based borrowing. If nothing else the extension repayments which had existed for so long did highlight one fact; short term borrowers were able to successfully maintain monthly repayments. As such most short term loans lenders now offer customers the option to repay by way of monthly based installments. Usually lenders will offer a range of different options from which borrowers can make a selection at the point of borrowing. This means repayments which can start from only a few months and extend up to 6 months for example. The real difference here though is the fact that upon reaching the end of the term, providing all repayments are made, the account is deemed as fully repaid.

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