Since there is no specific UK law regarding payday loans, payday lending within the UK is regulated by consumer credit legislation.
There has been much to-do about these short term loans, mainly regarding high interest rates and predatory lending practices. A ban on short term payday loans has been called for by some consumers. Those who find value in this financing are calling for additional investigation.
Under the Consumer Credit Act of 1974, lenders are required to obtain a consumer credit license through the Office of Fair Trading (OFT).
Those who choose to operate without this license are taking a big gamble. If discovered, they face fines or possibly imprisonment. The license is not a given- prior to issuing it, the OFT determines whether the lender is fit to offer short term payday loans.
The State Of Regulation Regarding UK Short Term Payday Loans
During its review, the OFT considers things like the business practices of the lender, previous consumer complaints, and offenses or convictions regarding dishonesty or violence.
If a consumer credit license is granted and it is later determined that the lender is unacceptable, the OFT can revoke the license. The lender will then no longer be authorized to offer payday loans in the UK. A lender operating with a revoked license faces the same fines and imprisonment as never-licensed lenders.
Under the Consumer Credit Act of 2006, a requirement was included that the OFT consider irresponsible lending when determining whether a lender was fit to hold a consumer credit license.
The credit industry was provided with specific guidance in March 2010, so companies offering short term payday loans have no excuse not to comply.
Resonsibility Is A Must
They must engage in responsible lending and determine whether the borrower can repay the loan in a manner deemed suitable. This includes being able to repay the loan without needing to take out an additional loan.
Those who provide payday loans must clearly advise why this financing is more suitable for short term borrowing than financing over the long term. They must provide the total cost to obtain offered short term payday loans and the APR must be included in all advertisements.
An explanation of the short term loans offered must be provided to borrowers. This should be detailed enough to allow consumers to understand whether they can afford this type of credit and be aware of associated risks.
It is possible to roll over many of these short term loans. Consumers must be informed of the effects of a rollover. Lenders are not permitted to roll over existing short term payday loans in a manner that is harmful or unsustainable to the borrower.
It is often the continued rollover of instant payday loans that gets consumers into debt.
When consumers are provided an online method of applying for these short term loans, special rules apply. They should not be permitted to enter credit agreements for these loans unless the credit arrangement features have been explained and they have a chance to question the lender.
Adjudications reached by the Advertising Standards Authority regarding payday lending serve as additional guidance.
Ongoing conversations regarding short term payday loans make it clear that additional legislation is likely to follow. The British Cheque & Credit Association and the Consumer Finance Association both have rules that members who provide these fast short term loans must follow. These rules are limited, though this may change in the future.