England Cracked Down on the Cash Advance Industry; the World Ended (Really)
In January 2015, Britain capped interest rates on loans issued by cash advance lenders. It did so in response to a growing concern by the Church of England and lawmakers. Their concern was about high interest rates on short-term loans. They were worried that these rates were sinking borrowers into a quicksand of debt. However, once England cracked down on the cash advance industry, the world ended (no, really). So, how did this regulatory action bring about the end of the world? It did so by sending desperate and vulnerable borrowers into the jaws of illegal loan sharks.
One Little Interest Rate Cap and the World Ends
Reuters published a few details about the rate cap. According to the news source, the cap ensures that no borrower winds up paying more than twice what he or she borrows. The Financial Conduct Authority, or FCA, said that this regulation has brought about major improvements for everyday consumers.
The numbers tell a different story. In 2014, when stricter rules were initially announced, the number of short-term loans, such as cash advances, were around 800,000 a month. Once the rate cap part of the proposal kicked in, the number of loans dropped to about 300,000 a month. People didn’t just stop taking out loans cold turkey. Instead, they were likely getting the cash advance loans that they needed from different sources.
So, What Was Included in the 2014 Rule Change?
The 2014 regulations are similar to the ones that the Consumer Financial Protection Bureau, or CFPB, is proposing for the U.S. When England established its set, the country included tighter supervision on cash advance online lenders, limits to how frequently borrowers can roll loans over into new ones and the ways in which cash advance lenders can withdraw money directly from a borrower’s bank account.
According to The Guardian, the lenders of cash advances and other alternate loans can only charge 0.8 percent of the amount borrowed per day. If borrowers fail to repay their loans on time, then cash advance lenders cannot bill default charges of more than £15. Basically, if a person withdraws a cash advance online for £100 under 30 day repayment terms, he or she will not be charged more than £24 in interest and fees.
These new regulations are tanking the cash advance industry in England. While it seems as though the rule changes are protecting borrowers, the lack of borrowing options is forcing some desperate people to seek money illegally.
Can the Country Continue Without the Cash Advance Online Industry?
With lawmakers making it tough for the lenders of cash advances online to stay profitable, the responsible course of action would be to give borrowers a safe alternative. If people could go to a traditional lender for the funds that they need and obtain the money quickly, then they wouldn’t require the services that cash advance lenders offer.
The end of the world scenario comes in because of the FCA’s discovery regarding how people were getting the emergency money that they needed. People were obtaining loans with local councils and utility companies. They were also using guarantor loans and pawnbrokers.
The chief of the FCA expressed concern that a side effect of stricter rules combined with a cap on the interest rate is illegal lending. He said, “We have to be careful that we do not create a market that encourages illegal lending. Going to illegal money lenders, or loan sharks, means that you are not protected if you find yourself unable to pay.”
Are Banks Gouging Customers for Cash Advance Loans?
After England’s Competition and Markets Authority gained criticism from lawmakers for failing to tackle high fees on overdrafts, the country’s legislators began looking into the financial industry’s practices more closely. The FCA published a statement that said, “The FCA will look in more detail at overdrafts from a consumer protection as well as a competition perspective using its full range of powers.”
The StepChange debt charity published a statement saying that more action by the FCA is needed to confront the transition that cash advance online lenders are making to installment loans. In this situation, overdraft charges are taking the place of excessive interest charges, so high-cost credit remains.
Mike O’Connor, the CEO of StepChange, said, “The need for caps in other markets has already been accepted as with payday loans and credit cards. There is ongoing consumer detriment from overdraft fees. Unnecessary delays in action risks further harm to financially vulnerable consumers.”
While Far From Perfect, Cash Advance Loans Keep the Financial World Spinning
Because the repayment terms for cash advance loans are similar to the ones required for payday loans, consumers often struggle to pay the money that they borrow back by the due date. This results in added fees because instead of just letting the loan go into arrears, most people roll them over into new cash advance loans, resulting in the infamous debt trap.
The Telegraph reports that the short-term lending industry is a major one in the country. Statistics gathered by the FCA show that 2.3 million people have taken out 16 million loans. Some do so regularly. For these people, losing access to emergency funds will put them in a tough financial spot. Lawmakers may need to find a way to make cash advance loans work for everyone. This means making them available to borrowers and profitable to lenders.
Raising Rates Before it’s Too Late
Back in 2001, Alan Greenspan made the critical error of keeping interest rates too low following the 9/11 terrorist attacks, and he kept them low for far too long. This caused a dangerous asset bubble that blew up years later. When the cost of borrowing goes up too fast, economic recoveries die off.
Mark Carney, England’s Alan Greenspan, is facing a similar situation. To prevent inflation, rates must rise. Low borrowing costs have caused England’s residential property to increase. The head of the Bank of International Settlements has also flagged high debt levels as a major issue for global economies.
Just last month, the Bank of England increased its predictions for the UK economy to a much higher point. This could result in rising interest rates. The Brexit is something else that could factor into interest changes. Carney said, “The Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way. Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting the necessary adjustment in the economy.”
Can England Save the World?
After breaking the world, can England fix it? By permitting lenders to charge higher rates, the country’s lawmakers may be able to shift the economy to a more stable place. Along with impacting the country’s low-income borrowers, those who make enough to buy homes are facing higher prices and everyone is under the threat of inflation. To read more about England’s interest rate cap and how it affects those who need cash advances to get by, head to the Personal Money Store.