When you need fast cash in an emergency, taking out a payday loan is a good way to get it. However, you need to be careful about the payday loan company with which you do business. While most companies are reputable, there are some payday loan businesses who only care about making money. One good way to tell if you are dealing with a reputable company is to know some of the regulations governing the industry.
Why Payday Loans Are Regulated
The use of payday loans in the United Kingdom has skyrocketed in the last few years. The industry has grown so much that each year, more than £2.8 billion is borrowed from payday businesses. With this kind of money at stake, many less than reputable companies have found ways to make money off of people needing money desperately.
One of the ways they make money is to charge very high-interest rates. When they were not being carefully watched by the government, some payday loan companies were charging interest rates of over 5,000 percent APR. It was estimated that due to the lack of regulation, payday loan customers were overpaying by as much as £45 million per year.
Limits on Loans
The Financial Conduct Authority, FCA, in the UK has placed limits on the amount of interest and fees for payday loans. As of January of this year, there will be a daily limit of 0.8 percent on the interest and fees on loans. In addition, the total cost of a loan will be limited to 100% of the original loan amount.
For those struggling to pay their debts, including any money borrowed from payday loans, the late fees are capped at £15. These limits will result in fees and charges of no more than £24 per every £100 borrowed from a payday loan business. This will significantly lower the rates for most payday loan customers.
These regulations will help to weed out the unscrupulous lenders who make money off of people who need to borrow money to pay for emergency situations. By knowing this information, it will help you avoid scams that can be prevalent in the payday loan industry. This information could end up saving you a significant amount of money.
Bad Practices by Lenders
When you want to take out a payday loan, there are ways to spot an unethical lender. Some of the practices they will engage in include:
- Pressuring you to borrow more money than you need.
- Hiding information about their loan process.
- Charging a fee to find a lender for you.
- Overcharging on loan interest.
Pressuring You to Borrow More Money
A reputable lender will not try to get you to borrow more than you can afford. Payday loans are meant to be small loans to help you get by until your next payday or to help you pay for emergencies when you don’t have any money in the bank. For instance, if your car breaks down or if you need a new tire, you can go to a payday loan business to borrow what you need.
Some payday lenders will loan you amounts as small as £50 and as much as £1000 to £1500. Most lenders will not try to get you to borrow more than you need as the loan needs to be paid off with your next paycheque. However, some lenders will push you to borrow more, then when it cannot be paid back on time, they will charge late fees and other charges.
A reputable lender will disclose everything about their payday loan process to you when you go to borrow money. They will tell you their interest rate, what fees may be applicable and what fees you may face if you fail to pay the loan back on time. If you go online to apply for a payday loan, all of this information will be on their website.
A lender who is trying to scam you will not disclose all of their information to you. They may not tell you about their charges and fees until after you’ve signed for the loan or they may put it in fine print on the loan contract. You could end up paying way more than you should if you don’t get all of the necessary information upfront from the lender.
Charging Fee for Lender Search
Some online payday loan services are not directly from payday loan companies, but they are businesses that match lenders to people wanting to get a loan. Most of these companies do not charge a fee for their matching service. Their fee is generally paid by the lenders, not the customers.
However, some of these services may try to charge the customer a search fee to try to make more money from them. If a company does charge a fee, do not do business with them as there are many more businesses who provide this service free to those looking for a loan.
Overcharging on Interest
One of the more common practices that a less than reputable payday loan company will try to get away with is charging too much for interest. With new limits on the interest rates that can be charged, you need to look out for companies that are still charging too much interest. You could end up pay much more for the loan than you should.
Carefully read over the information on any payday loans for which you apply, this includes loans taken out online. Since most people go online to take out a payday loan, it is estimated 84% go online rather than to a local payday loan store, there is more opportunity for them to be scammed.
If you carefully read all of the information and know some of the regulations guiding the payday loan industry, you can find short term loans offered by an ethical provider and not end up paying more than you should. You shouldn’t have to pay more to get a small loan quickly in an emergency.