On 11th November 2014, the FCA announced major news for the financial industry or the payday loan industry to be accurate. The announcement was that it will cap the costs of payday loans starting from 2nd January 2015. The cost cap of interest rate on payday loans was 0.8%/day.
This news came as a pleasant surprise for borrowers who had borrowed loans with higher interest rates. The impact of this change on the payday loan industry was massive and in order to understand it a little better, below is an overview of how things have changed for the payday loan industry.
Fewer Payday Loans Offered by Lenders
One of the biggest and most prominent changes caused by this announcement was the reduction in the size of the payday loan market. Due to a decrease in interest rate on these loans, lenders became very particular about choosing borrowers. Financial firms made new and stricter criteria for lending, which significantly lowered the number of people getting approved for payday loans. According to the FCA, the first few months of this regulation, the number of payday loans borrowed has dropped by 35%.
Reduced Cost to Borrowers
Although the lending firms have become stringent with their payday loan approval and review process, more people are trying to borrow money. This increase in payday loan applications is due to the fact that the interest rate is capped at 0.8%, which means that if you have borrowed a loan of 100 pounds, you will be paying 24 pounds over top as interest. The interest rate will not exceed, allowing borrowers to design budgets and manage money in a better way.
Many firms are not too happy with the FCA cap, which is the reason they are not offering loans to many people. Only a few lucky ones get approved for payday loans and the rest have to suffer. As a result, many borrowers have to face trouble getting payday loans to meet their financial needs.
More Relaxation for Borrowers
A great benefit of this FCA cap that borrowers get to enjoy is that even if they fail to pay the fees on time, they will not be paying any penalty. The fees will remain the same and they can be more relaxed. This takes off the pressure off of borrowers’ shoulders as missing a couple or two payments doesn’t result in greater financial burden.
Greater Value for Current Borrowers
Another great benefit of this FCA cap is that it allows all payday loan borrowers to enjoy a lower payment. Those who had borrowed payday loans before the announcement of this cap can also benefit from this change as the lenders will have to put a cap on the interest rate from 2nd January onwards. So, any payment that they make after this date will be based on the new regulations laid by the FCA.
Since the FCA announced the cap on payday loans, more borrowers could benefit from lowered rates. However, this change also affected the number of loans readily available, decreasing the chances for more people to get approved.