Payday lending has grown into a major industry in the UK. As a result of the economic downturn, the sub-prime segment has experienced a significant increase in customers. Millions of individuals use payday loans to meet cash shortfall.
Despite their increased popularity, not many people are fully aware about payday loans. Here we will take a look at some of the important things that you should know about payday loans.
Costs of Obtaining a Payday Loan
The most obvious fact about payday loans is that they are expensive. These loans typically range in size from £100 to as much as £1,500. Prior to 2015, there was no price cap in the UK. However, the FCA introduced a price cap in January 2015 limiting interest and fees charged by lenders to 0.8% of the loan per day. They had also put a cap on default fees and total costs. Lenders cannot charge more than £15 per loan as default fees. Also, the total costs of the loan cannot exceed 100% of the amount borrowed.
Payday Loan Requirements
One of the reasons for growing popularity of payday loans is that they are relatively easier to obtain as compared to conventional loans. Most payday lenders only require that the borrower has a bank account and a steady source of income. Lenders do not usually conduct a thorough credit check to determine whether the borrower can repay the loan on time.
Legal Status of Payday Loans
In the UK, there is no limit on interest rates charged by payday loan lenders. Moreover, there is no limit on the number time a person rolls over of a payday loan. Every payday loan lender operating in the UK must have a licence from the UK Office of Fair Trading (OFT). This is mandatory according to the Consumer Credit Act of 1974. Moreover, the Consumer Credit Act of 2016 also dictates that OFT should ensure that a lender acts responsibly and is fit to hold a license.
Payday loan advertisements are subject to Consumer Credit Regulations of 2004. The regulations specify that the APR must be clearly stated in the adverts. Also, the adverts should indicate that the requirements for obtaining the loan.
Payday Loans Duration
Payday loans are short term loans. They are typically paid back over a period of one to three months. Usually people pay back the loan once they receive their next pay-check. Remember that the longer you wait to pay back the loan, the greater interest you will have to pay on the loan. Rates on payday loans can be up to 2,000%. So, if you roll over or defer paying the loan for more than six months, the interest rate incurred on the loan may be astronomical.
On a final note, payday loans are not for everyone. Typically people obtain these loans for very short duration. These loans can become dangerous if you don’t act responsibly in repayments. Keeping the above points in view will ensure that you don’t fall into a debt hole coming out of which will not be easy.