The once booming payday loan industry in the UK has taken a dramatic turn following the rise of compensation claims. The industry which was worth around £2 billion in 2013, has recently seen a huge overhaul following the introduction of stricter regulation by the FCA which has included a daily price cap of 0.8% and a limited default fee of £15.
Customers who believe that they were mis-sold payday loans are now claiming a refund on their loan and interest repayment. The average settlement is around £300 from high street lenders such as Wonga.com and The Money Shop and the continued rise of claims will have a profound impact on the industry moving forward.
Why would an individual claim compensation?
Those applying for payday loans commonly using the finance for emergency purposes and to tide them over until the following month. This can sometimes appeal to the most vulnerable in society, with the lowest credit histories and they have no alternative to paying high rates of interest for their loans.
Whilst 1.2 million payday loans were issued last year, there is commonly around 10-15% of customers who are unable to pay them back and this will result in default fees, extensions and more interest accumulated before they are able to eventually pay off their loan.
In the case of compensation claims, ex payday loan customers have a strong case if they defaulted on their loan and were subject to extra fees but under the belief that they were not fit to receive a loan to begin with. This could be due to being unemployed, on benefits, on a pension or having a very poor credit history including recent CCJs or IVAs.
Under these circumstances, such customers should not be granted a loan although they may still be accepted due to a lack of checks by lenders – and if this is the case, they may have the right to claim compensation. (Source: Payday Bad Credit)
Some lenders are not offering loans
Two of the industry’s biggest lenders are facing so many compensation claims that their websites state that they are no longer offering loans. However, existing customers with Wonga and The Money Shop must continue to repay their loans on time and as per the original agreement. The two lenders cannot change the terms of the loan agreement with their existing customers – as these must stay the same.
Rise of alternative products
With more pressure on the payday loans industry and two of the largest players no longer offering loans, there is an opportunity for an existing lender to emerge and become the market leader.
Equally, with payday lenders under fire, there is scope for new alternatives to emerge. Some existing lenders have started to move away from the traditional payday loan model of loans for 14 to 30 days to offering flexible overdrafts and more long term loans. These loans are repaid over 6 to 24 months and are designed to give customers more breathing space and are more similar to a personal loan. (Source: MY JAR)
There is also more information available online about credit unions, which act as non-profit organisations and are able to provide very small loan sums to individuals within their local community and religious group. Available from 26% APR per year, it is a strong alternative to payday lending despite taking around one week to receive funds.