Payday loans play a significant role in the credit market. They allow people to cover an emergency cost by borrowing a few hundred dollars or pounds for a couple of days or weeks, until they next get paid. Millions of people use payday loans a year, and for many of these people such loans are an invaluable resource when it comes to borrowing.
Not everyone can access traditional forms of credit, whether it’s a bank loan or a credit card. If you have a poor credit history, short term loan providers may be your only real option, as other lenders would turn down your application. Payday lenders tend to focus just as much on an applicant’s affordability as their credit rating.
You may be well versed in payday loans, especially if you’ve taken one out in the past. Or perhaps you only know what you’ve picked up through hearsay. We’re going to take you through some payday loan basics, and compare payday loans in the UK and the US.
First of all, what exactly is a payday loan? It’s often lumped together with other types of short term credit, but payday loans are distinct in that you repay the funds as a lump sum rather than in monthly instalments. As the name suggests, you generally pay back the money when you next receive your wages.
One of the best things about payday loans is that because they are so short term, you may not end up paying too much total interest. Although known for their high interest rates, if you’re only borrowing the funds for a few days or weeks at a time, the interest probably won’t total up to a large amount. The confusion lies in the fact that interest rates are advertised in APR (Annual Percentage Rates) which doesn’t really apply to payday loans, as you won’t be paying them back over the course of a year.
While there used to be many UK payday loan providers on the highstreet, the most famous of which was The Money Shop, such businesses have now closed up shop. This means the payday loan market in the UK is now based completely online.
The payday lending industry was at its peak between around 2012 and 2014, before stronger regulations were put in place. During this time, the market was valued at approximately £2 billion a year, with more than 200 payday lenders offering loans, and over 2,000 brokers selling leads. With the emergence of Wonga, payday lending also became less taboo – by advertising heavily across a range of platforms, and investing money in sponsoring football teams, they made payday loans a mainstream product.
Due to the relaxed regulations during this period, lenders often applied outrageously high fees for late payments, and interest increased at an astronomical daily rate. Customer data and leads were also heavily circulated, being resold time and again.
When the Financial Conduct Authority (FCA) were brought in to regulate the industry in 2015, the payday lending market started to decline, with an instant drop off of more than half the UK lenders operating across the country. The new regulations the FCA implemented included more transparency from lenders, and a total interest cap of twice the amount originally borrowed.
The market fell further into decline when the FCA started to encourage past borrowers to claim compensation for mis-sold loans, and put even heavier regulations in place in terms of the payday loan underwriting process. This saw some of the UK’s biggest payday lenders, such as Wonga, QuickQuid, Uncle Buck, PiggyBank, Peachy and The Money Shop go into administration.
Perhaps the main difference between the UK and US payday loan market, other than the size, is the fact that the US still have payday stores and the market is not just based online. In fact, up until fairly recently, there were more payday loan stores than there were McDonalds or Starbucks outlets.
As you can see from the figures in the graphic above, there are four times as many borrowers in the US as there are in the UK, though it should be noted that there are around five times the number of US residents than people living in the UK.
It’s the difference in the number of lenders that’s interesting – due to the stricter regulations that were introduced in the UK, the number of loan providers dramatically decreased, but this has not happened in the US. That’s not to say that the industry isn’t regulated though – in recent years many rules have been introduced to protect consumers, making payday loans online or in stores much safer for borrowers.
It’s also important to bear in mind that not all states in the US allow payday loans – payday loans are available in a total of 36 states. The state with the largest number of payday lenders is California, with over 2,000 lenders, followed by Texas, which has around 1,600 payday loan providers.
The regulations around payday loans are also very state orientated – some have much stricter rules than others, and most payday loan states have different percentages when it comes to the maximum amount of interest the lenders can charge. In the UK, on the other hand, the same regulations and guidelines are used across the country.
As we have seen from recent years, regulations are only getting more rigorous in the payday loan market. It’s likely that this trend will continue, making payday lending safer for borrowers, particularly in the US. We may also speculate that across the US, regulations will become more uniform from state to state, perhaps with federal guidelines implemented.
In terms of borrowers, as the market adapts to the changes in regulations, a lot of people are turning to payday loan alternatives, such as instalment loans. Cash advances in the US are also becoming increasingly popular, as are peer-to-peer loans across the board.
It’s hard to know exactly what the future holds for the payday loan industry, but if the past has taught us anything, it’s that any change in regulation can have a big impact on payday lenders.