Thinking Beyond The Short Term
At Wagestream we’re over the moon that a recent survey of our users found that over 30% of them had avoided having to take out a payday loan from using our service. But it seems that it’s not just payday loans where interest rates come with many zeroes attached.
Debt Camel has highlighted a loophole (of sorts) in the FCA’s regulations that are designed to limit the worst excesses of payday loan companies. Or, as the FCA likes to call them, “High Cost Short Term Lending” providers.
Most of us would assume the important words in there were “high cost”, but in terms of legal wording “short term” is just as critical, because it means either:
(i) in relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicates (by express words or otherwise) that the credit is to be provided for a short term; or
(ii) under which the credit is due to be repaid or substantially repaid within a maximum of 12 months of the date on which the credit is advanced;
In summary: anything less than 12 months is short term, but anything longer falls outside the regulation. As a result, it’s completely legal for Loans2Go to offer 18 month loans at 989.9% APR (representative).
In fact, the interest rate is so high that monthly repayments on this 18-month loan are higher than they would be at the maximum APR that a payday loan provider can offer —so it’s not just the total repayment that’s higher, it’s the monthly cost too.
A £650 loan would result in 18 monthly repayments of £147 (totalling £2,650 in repayments, or £2000 above the initial loan value). Yet:
We may have seen the end of the most expensive payday loans, but it seems there are still plenty of providers willing to exploit vulnerable borrowers.
Debt Camel believes the FCA should revise the definition of High Cost Short Term credit to include this type of loan. I agree. I agree a million percent.
