In recent years the UK has seen legislation to ensure that the companies who provide or broker credit are more strictly regulated.
For years, the online loans industry was self-regulated by the Office of Fair Trading, meaning that there were presented with a set of guidelines to follow for things like fees, charges and transparency, but they were not heavily enforced. But why is it the case that loans needs to be regulated? We investigate below.
Loans need to have stricter regulations in place as a way of preventing the activity of untrustworthy companies, who may end up deceiving customers and end up becoming a victim of fraud.
How does this happen? A customer may provide their details on a loan application online on a fake website. These details are not held securely and are then passed onto third-parties who use this information to scam the customer, without providing the loan.
It could also be through phishing phone calls, whereby fake loan companies pretend to be a legitimate company and try to obtain financial information. As stated by the FCA, customers are called by fraudsters who tell them they need to pay an upfront fee in order to access the loan – last year, this was an average loss of £740 per customer.
That is why it is important to check the FCA register to check that the loan provider is authorised, so that you do not become one of the 4,700 loan fee scams reported to Action Fraud yearly.
To ensure customers are not overcharged
Prior to the FCA’s price cap in the payday loans industry, some lenders in the market were charging APRs that reached 5,000% and even 10,000%. The price cap introduced in January 2015 limits charges to a maximum of 0.8% per day, meaning that the APR is around the 1,200% mark. Default charges are also capped at £15.
A price cap also encourages new competitors into the industry to undercut the current lenders and compete on price. Recent rules force lenders to display a link to at least one price comparison site to ensure customers can compare loans more easily
To ensure consumer confidence in borrowing
Better regulation helps with maintaining consumer confidence when it comes to borrowing money in store or online. This stimulates the economy by providing jobs, rent and more, and it reduces the need for borrowers to look at illegal means of borrowing including loan sharking.
Increasing customer understanding
Another benefit of recent regulations implemented means that lenders now need to provide borrowers with much more transparency when it comes to additional fees and charges involved with taking out a loan.
This means that there is less chance of customers getting caught out by large fees for missing repayments and spiraling into further debt.
Information extracted by Robert Quinn.