The cap has been a long time coming. At last the FCA (Financial Conduct Authority) has implemented the cap on pay day lenders. The means that a borrower will never have to pay more than 100% of the original loan amount back.
There is already major changes in the market with many pay day lenders closing down with an estimated halving of loans. This is also because of changes implemented in July including limit on roll-overs, more affordability checks and controls on CPA’s which is a mechanism that has allowed lenders to take money from people’s bank accounts.
Whilst this is all welcome, it does not resolve the symptom cause of people needing payday loans. Some have warned of the risk that this will push people to illegal loan sharks. It is reckoned that around 70,000 people will not be able to get a loan under the new system.
This is why Credit Unions must play a very important role in the solution going forward as not only do they offer affordable loans, they also help give money management and debt advice. A crucial part of helping stop the cycle of debt that leads people to payday lenders in the first place. For example the London Mutual Credit Union would charge £3 on a £100 loan.
The UK currently has around 400 credit unions and a million members in total. Credit unions are usually move supportive than the high street towards people with bad credit histories. Plus APR rates vary between 7-40%.
The Government has now put in £38m for the Credit Union Expansion Project, launching next April. Within the scheme dozens of credit unions will bring together their resources to cut down on administration costs.
The project is run by the Association of British Credit Unions Ltd. A key part of the project is to improve the industry’s use of IT to enable instant credit scoring. Currently many Credit Unions will take over a week to lend money, where as payday lenders can offer instant loans. So this step will provide Credit Unions with a way to combat the USP of instant loans that payday lenders have had.
There will continue to be close scrutiny of pay day lenders, as many are now increasing there charges to the maximum level of the cap.
