Are Payday Loans Banned in the UK?

Are Payday Loans Banned in the UK

Given the amount of payday loan companies that have gone into administration, liquidation, or entered a scheme of arrangement in the last few years, it’s hardly surprising that you might think payday loans have been banned in the UK.

Well-known companies, such as Wonga, Cash Genie, Pounds to Pocket, Provident, and Sunny received high levels of complaints about irresponsible lending, high fees, and other unfair practices. These claims reached such a level that the companies could no longer afford to meet the expense of paying compensation to all claimants and could no longer remain in business.

After so many companies followed the same path, you can see why some people object to the existence of payday loans and would like to ban them.

But can you still get a payday loan in the UK, or is it illegal?

First, let’s cover what a payday loan is:

What is a payday loan?

A payday loan is a loan of a small amount of money designed to be paid back by the borrower when they next get paid. These loans do attract a high level of interest, but with a short-term borrow of only weeks, what you pay back can still be reasonable. Usually, a payday loan will be for amounts between £100 and £1000.

Some lenders also offer more of a short-term loan where you can borrow your money over between 2 and 12 months. This does mean you’ll pay more interest overall, but your monthly repayments will be smaller and could be more manageable.

You’ll usually apply online and have to provide your personal details, such as your home address, phone number, income, and outgoings. The payday lender will then check your details and perform a credit check. They will also check for affordability. If your application is accepted, you could have the money in your bank account within minutes.

Sounds convenient, doesn’t it? So, what’s the problem?

Well, interest rates, as we’ve mentioned, are high, so this is an expensive way to borrow money. And it is possible to become stuck in a cycle of borrowing and attempting to repay, which could cause financial difficulties.

Are payday loans illegal in the UK?

Payday loans aren’t illegal in the UK. It is still possible to apply for a payday loan with a responsible company, such as Cobra Payday Loans.

While there used to be situations where individuals got into financial difficulties due to irresponsible lending practices and aggressive collections on the part of some payday lenders, the whole industry has changed in the last few years, and things are now much better, more regulated, and safer for consumers.

While some people are still of the opinion that payday loans should be banned, in our opinion, they do have a place in the financial market. They offer a way for people on a low income, perhaps with a poor credit rating, to still receive the help they need if there’s a problem, without the need to turn to loan sharks and other highly dangerous options.

Why are payday loans legal?

Given the behaviour of some previous payday loan companies and the fact that some people have got into financial difficulties, why aren’t payday loans banned? Why are they allowed to continue, and why isn’t the government doing anything about it?

Well, in 2013, the Financial Conduct Authority stepped in to regulate payday loan companies more carefully.

They did this because they were receiving so many complaints about payday loan companies’ irresponsible lending and sometimes aggressive tactics.

Here are the new regulations they introduced:

1) Affordability

All payday lenders must now ensure that anyone they lend to can afford to pay it back. They must look at the applicant’s credit rating and the affordability of the loan.

2) Cost and fees cap

Payday lenders can now charge a maximum of £15 for a missed or late payment. There is also a cap of 0.8% per day on the amount lenders can charge for a short-term loan. Additionally, there is a ban on charging more than 100% of the amount borrowed, so anyone with a payday loan will never pay more than twice what they borrowed.

3) Limit on rollovers

Previously, there was no limit on how many times a company could extend or roll over a loan, leaving many people endlessly paying amounts that they were unlikely to be able to afford that cost them a huge amount in interest. Now, payday lenders can extend a loan only twice, and they must provide every customer with an FCA information sheet on organisations that offer debt advice when they provide a loan extension or rollover.

4) Limit on repayment requests via CPA

Payday lenders cannot try to collect a repayment via Continuous Payment Authority (CPA) more than twice if it is unsuccessful. They are also not allowed to attempt to take a part payment using this method.

Lenders face heavy fines if they give loans to people that they know can’t afford them or if they don’t do credit checks and affordability checks.

These new regulations have made the payday loan industry a lot safer for consumers and kept in place a short-term solution for those who may need a quick loan to help with an unexpected problem.

If you must take out a payday loan, it’s best to save it for urgent need rather than simply borrow because you’d quite like a weekend break before payday, or you’ve seen a new gadget you just have to have. Save it for when the pipes burst or the washing machine breaks, and it’s still far too long till payday to manage without financial help. It is possible to manage a payday loan successfully and take advantage of short-term credit to deal with a genuine emergency without getting into financial difficulties. Be responsible, make sure you can afford the repayments, and stick to them, and you should be fine.

Make sure you choose a responsible lender that’s regulated by the Financial Conduct Authority, like Cobra Payday Loans. Get in touch if you have any questions, or apply online now.