Payday
loans are high cost short-term and unsecured cash advances obtained for
small amounts of money. They are also called payday cash advances. If
your payday is still days away and you are hit by an emergency
situation, a payday loan can save you lot's of trouble. You can access a
payday loan from a street corner shop, internet site or licensed
individual. It's easy and quick to access for as long as you provide
proof of previous payroll or employment record. The lender is in turn
given a post dated check (bearing the loaned amount, interest and other
charges), which the lender cashes when the loan term expires or after
your next payday. Loaned amounts do not usually exceed $500 and typical
charges plus interest are usually between $10 and $30 per $100. An
amount that looks affordable until the loan is rolled over. If
you are not able to pay off your loan on your next pay check, the loan
is said to be rolled over or carried forward into a new term. The lender
adds on a surcharge to the total amount (loan and interest) you already
owe for the next term. Rolling over is a controversial issue and in
some jurisdictions it has been outlawed. Typical loan terms are 7-30
days.
Payday loans in the UK
In
the UK strong regulation has been enacted as a result of the efforts of
consumer legal advocates
and welfare agencies for increased protection for payday
loan borrowers. The Financial Conduct Authority(FCA) took over
regulation and registration of payday lending firms on 1st April 2014. Payday
lenders in the UK, charge interest rates of 1-2 per cent per day. This
translates to an annualized rate(APR) of 365-730 per cent. This is way
too expensive for the borrowed amount. The Financial Conduct Authority
(FCA) has come up with new regulations to curb these usury charges as follows;
- A maximum charge of 0.8 per cent in interest and fees per day or an annualized rate 292 per cent for £100 loan.
- A maximum rollover or default fee of £15 for customers who miss repayments on their next pay check.
- A maximum cap on interest and fees chargeable of 100 per cent of the amount borrowed,
irrespective of how long the loan runs.
In
simpler terms, if you were to borrow £100
for a 30day term, and repay on time, you would incur a total cost of
not more than £24, while taking the
same loan for 14 days would cost no more than £11.20 in fees and
interest.The new regulations will become effective on 1st January 2015.
Payday Lending in Australia
In Australia, the payday lending industry was loosely regulated until August 2012 when the Consumer
Credit
Legislation Amendment (Enhancements) Act 2012 was passed by Parliament
to further strengthen the National Consumer Credit Protection (NCCP) Act
enacted in 2009 to regulate payday lending. Payday loans are also
legislatively known as Small Amount, high interest, short-term loans.
Payday loans are structured as follows;
STCCs(Short Term Credit Contracts)
STCCs
have a loan term of 15days and less. These are banned by law regardless
of whether they are secured or not. Lenders are explicitly prohibited
from entering into STCCs.The rationale for banning STCCs was to address
the risk of repeated use of this type of contract and the financial
hardship which may result.
SACCs (Small Amount Credit Contract)
An
SACC is a non-continuing credit contract where the credit limit
is $2,000 or less with a loan term of 16days to 2 years, and the
borrower’s contractual obligations are not secured by a mortgage. Lenders
are prohibited from charging interest on SACCs but charge a maximum
establishment fee of 20 per cent of the adjusted credit amount and a
maximum monthly fee of 4 per cent of the adjusted credit amount. The
adjusted amount
equates to the borrowed amount plus lenders fees.
MACCs (Medium Amount Credit Contract)
MACCs
are unsecured credit contracts in which the amount being lent is
between $2001 to $5000, and the contract term is between 16 days and two
years. With this kind of credit contract lenders are allowed to charge a
fee of up to a maximum of $400 in addition to an interest rate of 48
per cent per year.
In addition to the above regulations, lenders are required to;
- Assess the credit worthiness of the borrower which may include checking credit reports, employment record, bank statements, etc.
- Disclose detailed loan terms including warnings such as this: "Do
you really need a loan today? It can be expensive to borrow small
amounts of money and borrowing may not solve your money problems."
Payday lending in the US
Payday
lending is regulated by the Consumer Protection Bureau in the United
States. There is very
limited federal payday loan regulation,
and, despite the recent creation of the
Consumer Financial Protection Bureau, the regulation of payday lending
is still
largely a matter for the individual states. Payday lending industry is
legal in 37 states. Some US states regulate payday lending
by imposing truth in lending and other disclosure obligations,
responsible lending
rules, and limits on the allowable amount of interest on loans.
In
other states, such as; Arkansas, Georgia, Maryland, New York, etc, legislatures have concluded that the harm caused by payday
loans to borrowers is so acute and thus have prohibited these loans.
Payday lending Canada
A
wide range of approaches to the regulation of payday lending exists
across Canada’s provinces (where, again, there is only limited federal
regulation of payday lending). Payday lending is allowed under section
347.1 of the Criminal Code of Canada for as
long as there is sufficient provincial
legislation provided for payday lending. In the event
that no such provincial legislation exists (as is the case in New
Brunswick, Quebec and Newfoundland) payday loans are restricted by usury
laws to an interest rate not exceeding 60 per cent per year.
