What is a Payday Loan?
It is a loan that is intended to be taken out over a short period of time. Typically they are advertised as a way to fund unexpected purchases that occur when you are short of cash and waiting for payday.
How much can you borrow?
Typically up to £ 1,000 although some lenders limit the size of the first few loans. The loan periods start with less than a week and sometimes last up to months. There are usually no early repayment fees, but there are fees for setting up the loan and interest. For example, Wonga charges interest at 1% per day.
Why are they controversial?
The cost increases quickly if you miss the repayment or decide to extend the loan; What started out as a small loan can grow quickly with additional interest and fees. Lenders have also been accused of searching borrowers’ bank accounts with the help of Continuous Payment Authorities (CPAs).
What is a CPA?
A CPA allows a company to withdraw a series of payments from a customer’s bank account without obtaining separate approval for each.
What’s the problem with them?
When you grant a CPA to a company, they may make repeated attempts to withdraw different amounts of money from your account without warning. Payday lenders have been accused of making multiple attempts on borrowers’ accounts while attempting to make loan repayments. If their request for the full amount is denied, they sometimes try to ask for a lesser amount and keep doing so until they have reclaimed as much cash as possible. That can mean that as soon as cash hits a borrower’s account, it is withdrawn again – giving the payday lender priority over their rent or mortgage payments and other bills.
What do the new rules say?
Lenders can only make two unsuccessful attempts to use a CPA to reclaim a repayment, then they will be expected to look with the borrower to find out what is going wrong. You must not attempt a partial collection. You will also be prevented from renewing loans more than twice and will have to conduct stricter affordability checks. When a borrower applies for a loan extension, they must be provided with sources of free debt counseling.
Why hasn’t the FCA banned CPAs?
The FCA advises that CPAs aren’t all bad – there are typically no fees if a company tries to withdraw funds from your account through a CPA but fails. If the direct debit fails, fees will apply.
What does this mean for lenders?
It will likely have a huge impact on companies that have previously been able to loan out knowing that they will get at least some of their money back. Limiting CPAs will force companies to do more rigorous controls and hit the profits of those who have recklessly lent knowing they could get at least some of their money back. Hilary Osborne