When you think about finance, London is what comes first in mind. But do you know that London acquired the title of financial centre of the world much later. Previously, Rome (now Italy) was the centre of all financial activity. That’s where the modern day accounting was perfected by Jewish merchants and that’s exactly where finance was born. But when it comes to payday loans, they first originated in the US and then gradually spread to the UK as well. Now payday loan industry in the UK is valued around £2.2 billion. This clearly shows that the payday loan industry is growing by leaps and bounds. Here is a short history of payday loans in the UK.
In the Beginning…
The first official payday loan business was initiated by William Allan Jones in Cleveland, Tennessee in 1993. The idea of Mr. Allan was to offer a short term loan in exchange of a post dated cheque that matures on the day when the salary would be credited into the borrower’s account. The borrower has to return the principal amount and an additional interest amount as well that was negotiated at the time of borrowing. Since it is a short term, high risk loan thus, the interest on payday loans is generally high as well.
The Growth Phase
Just a decade later after the payday loans first emerged in the US, they grew into a massive $8 billion industry and the idea of payday loans also spread to other countries as well. In the UK, payday loans were first offered in the retail shops to individuals who needed a small amount of loan to meet their short term expenses just before their payday. These loans are easy to borrow and no extensive paperwork is involved in the process. Most of the process is done electronically and the borrowers can borrow money via their laptops and Smartphones.
According to a research conducted by ACCA UK, the payday loan industry was valued around £3 million in the year 2006 and in 2012 the payday loan industry extended the credit that was worth more than £3 billion. This exponential growth of payday loan industry was mainly a result of 2008 credit crunch that forced the banks to reduce their public lending. Thus, the individuals who needed credit had to borrow short term credit either from pawn shops or from payday loan providers.
A Little about Payday Loans
So we’ve babbled a lot about the history of payday loans. It’s now time to look at what the payday loans actually are. Payday loans are an unsecured form of loan that is lent for a short period of time, generally 90 days. Since no collateral is required, these payday loans are becoming popular among many individuals who found themselves out of money days before their next payday. The maximum amount that a person can borrow is usually £3,000. This type of loan is only granted to salaried individuals without assessing their credit worthiness.
Do we have a watchdog here?
The payday loans industry sprouted in the US because of the deregulation of the depository institutions and lending authorities. In the UK however, the payday loan industry is not completely deregulated. This industry is regulated by the Financial Conduct Authority (FCA) that sets certain rules and parameters and the payday loan providers are bound to follow the rules in order to avoid penalty. Following are some rules and restrictions that the FCA has imposed on the players in this industry.
- A payday loan provider can only charge a maximum interest rate of 0.8% per day and an interest of 100% per annum on the amount lent. This interest is inclusive of all the fees.
- Payday lenders can only charge a maximum of £15 per day as penalty if the borrower is unable to return the amount on time.
- The data regarding the loans has to be shared with all those who operate in the payday loan sector. This is done in order to make the industry much more transparent and competitive.
- Any company or retail store that wishes to operate in this market has to seek permission from the FCA.
- The FCA can initiate an investigation against any payday loan facility provider and can also take legal action against them if there are signs of insider dealings.
Future of Payday Loan Industry
The regulations of the FCA has increased barriers to entry in this segment and at the same time has also ensured that only the responsible lenders operate in this high risk industry. This is overall good for the borrowers. Many payday loan providers are now also offering loan for up to one year. This means that in the future payday loan industry will provide a competition to the banking sector and may even be viewed as its alternative by the borrowers. The one con of payday loans is the sky-high interest rates. If that can be reduced then the future of payday loan industry does look a lot bright.
The Search for the Best
According to a press release published by ‘The Centre for Social Justice’ around seven million people in the UK avail payday loan facilities for their short term monetary needs. Now, before you borrow money from a payday loan provider, you must compare the loan providers so that you can choose the best deal available in the payday loan market. We at quiddicompare provide our users with the facility to compare all the well-known, reputed and trustworthy payday lenders and their APR rates. Visit our website today to find out the lender that best fits your requirements.