Is it the fact that more consumers are aware of their rights or is it because the government is cracking down even more on the payday loan industry? In any event, the payday loan industry is being complained about a lot by customers this year, says a new report from a government watchdog.
Between April and September 2016, the Financial Ombudsman Service (FOS) reported that it had received more than 5,000 complaints about payday loans. This is up from 3,200 payday loan complaints made between April 2015 and March 2016, which is an astounding and significant increase.
What exactly are borrowers complaining about? It seems the primary reason is the affordability and cost of these short-term, high-interest loans. This is something that has plagued the payday loan industry for years, and one of the reasons why the government started to rein in these companies.
Gillian Guy, CEO of Citizens Advice, suggests that these complaints are still being made because payday loan businesses refrain from performing background checks to ensure the borrowers can pay back the funds without accruing any substantial interest rate charges and other exorbitant fees and charges.
Experts warn that if lenders do not do background checks, then it is possible that a great number of their customers cannot afford the terms of an agreement.
He further noted that, even though the group has assisted borrowers in reducing the amount of money they owe to payday loan companies thanks to the Financial Conduct Authority (FCA), many lenders are “failing to carry out basic checks to make sure people can afford to pay back what they borrow.”
The organization has repeatedly urged the FCA to mandate every payday lender to perform financial checks on applicants.
With the successes it has already made, Gillian believes the FCA can add to its initiative by making businesses that offer money direct to your account more responsible with better rules.
“This would mean lenders would be required to check whether borrowers can afford a loan. The FCA also needs to make sure people are not getting into difficulty because of other forms of high-cost credit,” said Gillian in a statement. “We have helped more people with rent-to-own debts than last year, with many reporting problems with meeting repayments. Extending the payday loan price cap to the rent-to-own market could protect consumers from the high cost of these agreements and stop people falling into worsening debt.”
Since 2014, the FCA has implemented new rules and regulations for payday loan businesses. The results of these endeavors have been greater fines, more compliance and even lenders leaving the United Kingdom. The unintended consequence, however, has been a greater number of online lenders.
In other words, the likes of Wonga need to adapt to a much more regulated financial landscape.
Opponents of payday loans, whether they are in Europe or North America, argue that these alternative financial products do more harm than good for the most vulnerable in society. It is regularly argued that they send low- and middle-income households into endless cycles of debt and that more consumer protection rules are needed.
Payday loan proponents, however, say quite the opposite: payday loans are needed now more than ever. Because of the soaring cost of living, stagnant wages and unforeseen circumstances that arise, many borrowers need the option of payday loans, especially if they are unbanked or underbanked.