Often, these come with enormously high interest rates given that the loans are unsecured, fast and repaid quickly too. But with high rates, they have also attracted a lot of criticism, being accused of usury, loan sharking and aggressive collective practices and repayment terms.
However, changes to the payday loans industry in the UK suggest that the actual payday loan itself could be extinct by the end of this year, as we investigate below.
Pushed out by regulation
Whilst the payday lending market in the UK was thriving from around 2008 to 2014, this changed virtually overnight when the city regulator, the FCA introduced a whole new set of rules to limit their power. This included the introduction of a price cap to daily interest rates and default fees and also very strict rules surrounding eligibility and authorisation to offer such loans.
The result saw a huge depowering of the industry within a year, within around 80% of lenders and brokers exiting the market.
Further regulation in the last two years has allowed customers who were mis-sold payday loans to request refunds and compensation and the result was significant. 5 of the UK’s largest lenders refunded circa £1 billion and ceased trading – and these were well-known, established household names that went into administration.
Rise of formidable alternatives
Payday loan alternatives are not new, but few have been able to get traction until recently. Some startups have tried offering flexible overdraft facilities, lower cost payday loans and guarantor loans – as demonstrated by Lending Expert. However, the ones with any real success have been in salary finance.
With salary finance, it means that employers can financially help employees and offer very low rates, or zero percent interest for borrowing too.
The startups like Hastee and Wagestream simply act as the platform for thousands of employees who use salary finance – and ultimately it means that individuals do not need to rely on high cost payday loans. In fact, employees can also drawdown money in real-time as they earn it, which is perfect for those cash emergencies.
Lack of profitability in the space
So with fewer players in the payday space and strong alternatives available, there becomes little incentive for any new payday lenders to set up. Especially since the barriers to entry are high with FCA authorisation required and a time lag of around 6 to 12 months to be approved.
Payday loans are part of the economy and it is not surprising that around 3 million Britons have typically used them each year.
However, at this stage, there is little reason to suggest otherwise that: payday loans could be extinct by the end of 2021.