Online payday loans and affordability

When it comes to online payday loans one of the most important factors is that of affordability. Affordability in the context of these online loans relates to each applicant’s true ability to afford the loan and how lenders reach the conclusion as to whether they do or not. Surprisingly affordability has not always been at the centre of the approval process of online payday loans and in fact this has only become the case in the last few years. The tipping point was the introduction of the FCA as the regulator for the entire operations of the market. In early 2014 the Financial Conduct Authority (FCA) were appointed as the organisation responsible for the entire operations of all those lenders who offer online payday loans. This meant that the FCA had the required power to make changes where they were needed. In order to establish areas for improvement the FCA conducted a mass scale investigation into the lenders of the time and the common denominator; a lack of affordability assessment.

Not only did the FCA uncover the fact that lenders were not correctly identifying where loans were affordable or not; furthermore, the loans being offered were also lacking in flexible repayments which went against affordability. This issue stemmed from the fact that the product originally on offer was very limited. The product in question was known commonly as the ‘payday’ loan and as the name suggested offered a product which was focused specifically on repayments being made on the customers next pay date. Where this specific repayment structure was always made clear to borrowers, the cold hard facts of the manner were that in too many instances the loan proposed and later granted, was simply not affordable. The payday loan meant agreeing to a one-off repayment comprising of the entire loan amount plus the interest charged by the lender. Given that the loans themselves ranged in value from £100.00 to £500.00; it is easy to understand how the repayments due under such agreements quickly became expensive and it did not take long for the FCA to high light this fundamental flaw.

So not only were online payday loans limited in their product offering but through research the FCA conducted that this then lead to many instances where the loans being granted were simply not affordable as a result. In order to resolve this the FCA introduced an entirely new set of rules and regulations for the online payday loans lenders to operate by. This meant not only making their products more flexible, therefore making them more affordable and consumer friendly but in addition lenders were required to adopt a completely new approach to lending. This approach is one which centres around affordability and making sure the loan requested is truly and evidently affordable. In order to understand such manners adequately the modern day online payday loans lenders are concerned with greater levels of detail as far as their applicants are concerned and in addition have replaced payday borrowing with instalment based borrowing where suitable to do so.