What the New Payday Lending Codes Mean for You

The battle between federal financial regulators and payday loan companies has reached its latest turning point in attack, as the Office of Fair Trading (OFT) and Consumer Finance Association (CFA) outlined a strict – and thick – set of guidelines for lenders.

The code, which was given the stamp of approval earlier this week, will set out to restrict payday lenders from running rogue with their practice. It was compiled by the CFA, a body which represents nearly 90 per cent of payday lenders across the UK.

The code of practice comes on the heels of an extensive review by the OFT of various payday lenders across the country, which started earlier this February. The trade body contacted and scorned some 240 lenders, citing unscrupulous practices and poor treatment as their focal points of concern.

For struggling borrowers, these new codes couldn’t have come at a better occasion. In a recent survey by 100 Day Loans UK, 40 per cent of borrowers – the overall majority – believed that stricter regulations would most improve their payday loan experience. And some 47 per cent were using the loans to simply get by, with the overall majority taking one out to pay for everyday household expenses.

For federal governing bodies, the code will be heralded as a considerable achievement. The lending practices of many companies has been somewhat murky since the dawn of payday lending in the UK back in 2007, as terms, conditions and fees tend to vary from lender to lender. Some have complied with CFA standards, but others have not – and have gotten away with it.

But with the new code, lenders will now be required to emit a certain level of transparency for its borrowers, or face immediate shutdown by the OFT and CFA.

The new code will come with some significant lending alterations for frequent, and infrequent, payday loan borrowers. But, those changes may not be in the areas you’d expect.

Skinny on the Code

What are some of the major changes we should expect from the code?

According to recent articles from The Independent and BBC News, consumers should expect to see a few changes regarding the widespread practices of payday lending.

  • Lenders will need to give an example price for each £100 borrowed and display completely transparent pricing structures.
  • There will be a strict limit of three “rollovers” a lender can offer to borrowers.
  • Lenders will be given considerable oversight on the kinds of repayment tactics they employ to get borrowers to pay up.
  • Borrowers experiencing considerable financial difficulty will have the option of “freezing” their accruing interest.

Interestingly enough, however, these guidelines have been in place for some time for payday lenders. However, the CFA and OFT’s ability to watchdog has been somewhat unlimited, allowing many unscrupulous lenders to run awry with their practices.

“The revised code largely amounts to a re-brand of many of the existing rules that have been flouted by unscrupulous lenders for years,” explained Which? executive director Richard Lloyd.

But with a forced implement, borrowers will be experiencing some significant changes in their benefit. According to the study by 100 Day Loans UK, one-third of borrowers either had to get an extension for their loan or take out another payday loan to pay the initial one off. Paired with the new interest freeze, a great deal of borrowers may be able to escape a potential debt hook.

Will interest rates go down?

Herein lies the catch-22 of the new code. Despite the fact that lenders will be forced to freeze interest rates for particular borrowers and are denied the option of offering rollover loans for borrowers, they can still charge as high of interest rates as they please.

But, with the code’s new requirement of complete transparency, borrowers should have a better understanding of what they’re getting themselves into long before the financial problems possibly caused by a loan might accumulate.

Will every lender be required to comply with the new code?

No, the new code is completely voluntary.

However, as the OFT has stressed to concerned consumers, no lending practice will go unlooked. Although it’s not required of lenders to sign on with the code, they will certainly be having their every move watched by Big Brother.

According to Russell Hamblin-Boone, chief executive of the CFA, those less-than-compliant lenders won’t be hearing the end of it if they decide to forgo the code. “There are some lenders out there who are failing consumers and I’d welcome regulators getting them out of the industry.”

What should borrowers take away from the new code?

Although the new payday lending code will provide some much needed oversight for many lenders, it doesn’t alleviate the dire financial situation that many families across the UK are finding themselves in during this double-dip recession.

Although taking out an occasional payday loan can be a life-saver for many consumers, no loan can replace the necessity to remain incredibly frugal with finances. With the new rules of transparency, borrowers should always double-analyze the cost a payday loan will be, as well as an honest assessment of how – and if – they can pay it back on time.