True Blue Loans is really pleased that the new regulator (FCA) is focused on affordability

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Payday loans have been in the headlines for many years. Most of this has been due to the negative reviews attracted by them which focuses on the high interest rates charged, unsuitable lending and harsh recovery techniques. However, it seems in recent months that the number and tone of these headlines are changing. The Financial Conduct Authority (FCA), since taking over the industry in April 2014, has and already gone a long way in making changes to reform the industry. In January 2015 it implemented a host of caps on the interest charged, the default charges and total repayable amount. The FCA has capped the interest charged per day at 0.8%, per day, the default charges or late payment charges are capped at £15 and the total repayable amount should not exceed twice the original sum borrowed. Hence if a borrower has taken a loan of £100 the final amount to be repaid cannot exceed £200. This would prevent the out of control spiraling of debt.

True Blue Loans has always championed responsible lending and the current regulations put forth by FCA are a leap in the right direction. This will bring more affordable loans in the market and also give the borrowers a better choice. Many payday lenders like Wonga make their profits by charging interest rates in excess of 5,000% APR and bringing great hardships for the borrowers. A major part of their income was also based on the default payments by the borrowers. There were cases where the borrower took an initial loan of £200 and had to pay back over £1,500 after a couple of months due to the high interest rates and the additional penalties!! By putting a blanket cover on the maximum repayable amount these absurdities in the market will be eliminated.

Another area that the FCA are insisting that lenders take control of is affordability checking, that is making sure the customer can afford the loan in question. True Blue Loans has processes to make sure that loans taken by the borrowers are affordable to them. This is done by two pronged approach.

  1. When underwriting the loan they make sure that sufficient information is collected to allow for some simple mathematics to be performed. Income minus expenditure MUST leave enough to cover the payments on our loan (and a little bit spare incase of other expenses cropping up). While it is not possible to validate every item that the borrower puts, or doesn't put, on their applications, many of the main ones are validated by our team, either with third parties or documentary evidence. 
  2. Longer repayment period: When a borrower has to take a loan of £200 it would normally be due to an unforeseen expenses or emergency situation. With the tight budgets in the sector we serve it is generally difficult to pay back the entire amount, with interest, in one installment at the next payday as a traditional 'single instalment payday loan' would require. True Blue Loans gives the option of repayment in 3, 5 and 6 months. This means that the monthly instalments are lower and therefore shoudl be more affordable for people budgets. We do make it quite clear to customers that with this lower payment advantage there is a disadvantage that the loan will cost more overall. However this is a trade off that the customer must consider.

This repayment structure makes the loan affordable to a larger section of borrowers and helps them meet their expenses easily. The caps introduced by FCA started from January 2, 2015. Payday lending is a massive £2.8 Billion industry which needed strong regulation. Over a million people used these loans and many of them ended up getting trapped in the spiral of ever increasing debt burden. The government has the responsibility to curtail undue burden imposed by the payday industry and these caps should give good protection to the borrowers.

Since the financial crisis of 2008-09 the real wages of a large section of our country has gone down. This has led to severe constraints on the budget of many households. Along with this we are seeing an increasingly vocal public discourse on reduction of government spending on welfare and benefits. This inevitably means that the onus of maintaining a basic living standard will fall on the private households. More and more people are wanting to make savings for retirement from an early age which would supplement the retirement benefits they get from the government. However in order to make actual savings and build a retirement nest egg it is important to have low debt burden. If a person takes a payday loan and falls in a debt trap where massive payments are made to clear the debt it would leave very little amount towards savings. True Blue Loans makes sure that the additional burden of repayment of the loan is affordable so they can actually clear teh debt as planned. 

Payday loans gained traction in the last decade due to the ease and simplicity of getting loan from them. This has also been their biggest marketing point. Companies like Wonga would show cartoons on how easy it was to take loan and repay them. This gave a false sense of easy money to many borrowers. People would take payday loans for frivolous expenses like going on a night out with friends or buying expensive electronics. On the other hand any credit should be taken after much forethought and due consideration of how the repayment will be done. Affordability should be the cornerstone of any financial transaction. By making the entire process look easy the payday lenders got more applications and a higher market share. In the end this was at the detriment of the borrowers who paid heavy price for this marketing strategy.

This ease of processing and overlooking the affordability factor has also cost the payday lenders dearly. Wonga was forced to write off debts worth £220 million across 330,000 customers. These loans were given to borrowers who did not have the capacity of repaying them which led them into bigger financial mess. True Blue Loans sets out to make sure that the borrowers are given affordable loans and thereby intends to play a positive role within the entire financial system.

One of the biggest tasks within short term lending is educating the borrowers. Most of the borrowers find themselves facing unforeseen expenses and need instant alternatives to tide over these expenses. However besides assisting them in getting these loans at a reasonable charge it is also important in guiding them on how to plan the repayment. This not only provides valuable advice to the borrower but also reduces the defaults for the loan which in turn helps to reduce the interest charged within the financial market. True Blue Loans tries to go the extra mile in giving useful advice to the borrowers using which they can make prudent decisions. One piece of advice is to consider whether the loan is needed and how it will be repaid. We are never afraid to decline or discourage a customer who shoudl not be taking a loan.

The number of households affected by this regulation is huge and overall the financial ecosystem which will result from this would be much more stable, judicious and less taxing on the borrowers. The overall default rate within the industry should massively come down and there will be a reassessment of long term goals by various organizations. True Blue Loans will continue to work hard in its endeavor of providing affordable loans to borrowers which helps them with their financial needs and also provides a buffer for any emergency expenses. It believes that the current cap is of great significance for not only the borrower community but also the lenders as it will lead to better affordability checks and more responsible lending.