Payday loans, also known as short-term loans or cash advances, are a form of credit that allows you to borrow a small amount of money for a short period of time, typically until your next payday.
They are widely available in the United Kingdom, with many online lenders and storefront lenders offering this type of loan. Loans for small businesses can help you get started too, even if you have bad credit.
While these loans can be a convenient when you’re need of quick cash, they also come with high interest rates and fees that can make them costly.
To protect you from the potential harms of payday loans, the UK government has put in place several consumer protections.
Let’s have a look.
1. Can You Afford It?
One of the key consumer protections for payday loans in the UK is the requirement for lenders to conduct affordability checks. This means that before a lender can approve a loan, they must assess the borrower’s ability to repay the loan, considering their income, expenses and outstanding debts.
This helps to ensure that borrowers are only taking out loans that they can afford to repay, and it helps to prevent them from getting into further financial difficulty.
2. What About Extra Charges?
Another important consumer protection is the requirement for lenders to provide clear and accurate information about the cost of the loan. This includes information on the interest rate, fees and any other charges that will be added to the loan. This helps borrowers to understand the true cost of the loan and to make an informed decision about whether to take out the loan.
3. There Is a Limit to the Total You Could Pay
The Financial Conduct Authority (FCA) set a cap on the total cost of a payday loan in 2015. The total amount of interest and fees that a borrower can be charged is 0.8% a day, which sounds small, but it will add up. It means that a borrower will never have to pay back more than double the amount they borrowed.
4. Lenders Must Meet Fair Standards of Conduct
The FCA has the power to enforce these consumer protections and to act against lenders who do not comply with them. This includes the power to fine or revoke the license of a lender who is found to be in violation of the rules. The FCA also provides a complaints service for borrowers who feel that they have been treated unfairly by a lender, and it can act on their behalf.
5. What Are Your Other Options?
There are also several free and independent debt advice organizations in the UK that can help borrowers who are struggling with payday loan debt. These organizations can provide advice and support to help borrowers to manage their debt and can also help them to negotiate with their lenders.
The Financial Ombudsman Service (FOS) handles financial complaints from consumers. Get in touch with them if you feel you have been treated unfairly. They have the power to order corrections to your contract and even give you compensation.
6. A Source of Assistance When You Need It!
Payday loans remain a convenient way to bridge the gap between income streams. However, due to their high interest rates, you must only use them in the short-term.
Always explore your other means of income first. If you do get into trouble, there are organisations there to help you.
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