Do Payday Loans Still Exist?
At one time, payday loans seemed to be everywhere. Short-term loans with high interest rates were once widespread across the UK, but in recent years, major regulatory crackdowns have led to the demise of many top payday lenders. So, can you obtain a payday loan today?
The short answer is yes. Direct payday loans are still legal and available from certain payday lenders, albeit in a more limited capacity than before. However, tighter regulations mean the landscape of short-term lending has changed considerably since payday loans first emerged in the early 2000s.
What were payday loans?
Payday loans, also known as cash advances, were designed to provide fast access to cash for those in financial difficulty between pay cheques. They were marketed as a stopgap for covering emergency costs or an unexpected bill until your next payday arrived.
The appeal of payday loans was their speed, convenience and limited eligibility criteria compared to other loans. The application process for payday loans online could be completed in minutes with instant decisions, funds were deposited straight into your bank account, and a poor credit score didn’t necessarily preclude approval.
However, critics argued payday loans trapped vulnerable individuals in cycles of debt. High interest rates often exceeded 1,000% APR, and late repayments incurred large penalties and spiralling charges. If you had a low income and financial difficulties, it was all too easy to become reliant on rolling over short-term loans from lenders and sinking deeper into debt and bad credit when a long-term solution was required.
The regulation of payday loan lenders
In response to concerns over irresponsible lending, short term lenders and unaffordable debts, the Financial Conduct Authority (FCA) introduced stricter regulations on payday lending from 2015, including an interest cap. Under the new rules:
- Interest rates and fees were capped at 0.8% per day. This equates to annual interest of around 365%.
- Default charges were limited to £15.
- Total cost of borrowing was capped at 100% of the original amount.
- Changes to the application process meant affordability checks became mandatory before approving loans.
These measures significantly curbed the profitability of payday loans for lenders and caused many to collapse into administration.
Can you still get a payday loan in the UK in 2023?
The FCA’s intervention largely wiped out the biggest payday loan companies. However, the regulations didn’t outright ban this type of high-cost short-term credit (HCSTC). Some payday loan lenders continue operating in the space but in reduced numbers.
Remaining payday lenders must comply with the price cap and conduct stringent affordability checks before approving loans. This makes accessing short-term loans until the next payday more difficult than in the past, especially for those already in financial hardship. The maximum payday loan available now is typically around £1,000.
Payday loan alternatives
Rather than turning back to high-cost payday lending, those in need of fast funds do have other, often cheaper borrowing options:
- Overdrafts - Arranged overdrafts allow you to borrow up to an agreed limit from your current bank account. These are now capped at around 40% annual interest. Unarranged overdrafts can still have higher charges.
- Credit cards - Many credit cards offer 0% introductory periods on purchases and balance transfers. This allows interest-free spending or consolidation of existing debts for a limited time.
- Personal loans - A more affordable alternative for longer-term borrowing needs. Those with very poor credit may pay higher interest, but this is still likely to be less than most payday loans.
- Logbook loans - Secured against your car, but charges are capped at around 50% annual interest.
- Guarantor loans - If you have a friend or family member willing to guarantee repayments, interest rates are far lower than payday loans.
- Buy now pay later schemes - Allows spreading costs over instalments at major retailers. Late fees apply for missed repayments.
Is it ever advisable to get a payday loan?
Payday loans do still serve a niche for emergency borrowing. The FCA caps and tighter eligibility checks offer more consumer protection, but the costs can still be high compared to alternatives.
A payday loan may be an option if you have a poor credit score with no other means of obtaining funds, are certain you can repay the loan quickly and will not need to roll over borrowing.
Friends, family, your bank, employer, or local council may be able to help in a crisis, rather than taking out a payday loan. If you’re already caught in a cycle of payday loan debt, avoid further borrowing. Speak to a debt charity or professional debt management company for free advice on creating a plan to regain control of your finances.
Take control of your finances with DFH
If you need help dealing with payday loans or other unsecured debts, the team at DFH Financial Solutions can provide expert guidance and ongoing support. We understand that anyone can experience financial difficulty and have years of experience providing debt advice to people across the UK.
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