Why is regulation so important?

The short term loan market needed regulation a long time before the Financial Conduct Authority (FCA) stepped in.  For example there is currently a campaign running against logbook loans to raise awareness of the dangers of that type of finance and highlighting why the law should be changed to make it more difficult for people to be able to sell a car on with a loan attached to it.  With no authority overseeing the market it was quite easy for lenders to charge hidden fees, not be upfront about what their fees actually were, and to use aggressive tactics when it came to collecting debts.Regulating loans

The same became true for other types of short term lending, which became incredibly easy to obtain with the rise of the internet and the ease of applying online.  Even with regulation it will still be very easy to apply for a loan with a high interest rate and receive the money on the same day.

Authorisation

One of the main benefits of regulation is that the FCA has to authorise all companies that offer short term loans to consumers.  If the companies don’t meet the FCA’s requirements they will suffer serious sanctions, which could include being forced to cease trading.  Having this threat over them will force many of these businesses to change the way they do business in order to comply.

Regulation means that consumers will be safer when applying for and using loans.  Consumers may not necessarily realise that anything has changed when they first apply for a loan, but there will be a difference in the way that the loan is handled by the company.

Loan regulation has been due

It is hard to believe that the industry carried on for so long without outside regulation.  It wasn’t until things became so bad that there had to be a change by the government to make sure that more consumers didn’t suffer at the hands of certain businesses.

Ignoring Debt is Never a Good Solution

When someone goes into debt they can sometimes think that the best solution is to ignore the debt and carry on, hoping that it will go away.  Of course it wont go anywhere, and if anything will get worse over time.

Interest charges and missed payments will add up until the amount becomes almost unmanageable in many cases.Too much debt

Keeping in contact

One of the best solutions for dealing with this problem is for the person in debt to contact the company they have the loan from.  If it is explained that they aren’t able to pay the loan back, they may be able to get a deal that gives them reduced payments or that allows them to cut the debt back.

The loan company won’t want the customer not to be able to pay their loan at all.  They would rather gain some money back than nothing at all, so in most cases they will work with the customer to recover as much of the debt back as they can.

Security for a loan

If there is an asset that was used as security for the loan such as a house or car this asset will be at risk if the customer just ignores the loan companies demands.  If the customer actually speaks to the company they may be able to come to an arrangement that reduces their payments, or one that gives them a break from paying until they get back on their feet financially.  This is a much better alternative to their house or car being repossessed, which does happen on a frequent basis, often because those in debt don’t communicate properly with loan companies.

Companies use assets as security for a reason, to protect themselves if a customer defaults on a loan.  This is even more the case when it comes to short term loans where the lender does not check credit scores but needs some kind of backup if the customer defaults, this will invariably be an asset that has value.

Credit scores

By ignoring debt, a persons credit score can be adversely affected quite seriously because the record will show a series of missed payments which will make it extremely hard for the customer to be loaned money in the future.  It will be almost impossible to borrow money when a lender sees the potential borrowers past history when it comes to paying back loans.  This is often why companies that do not conduct credit checks on people are popular, because borrowers do not have to show their credit history to lenders when it is bad and they haven’t been accepted for a loan elsewhere.

Ignoring any kind of financial situation is not usually a good idea because it will always catch up with you in the end.  Loan companies will always chase debt that they are owed and the people they have doing this are experts and have seen it all when it comes to collecting outstanding loan amounts.

For people that do find themselves in debt with no way out, there are charities that can provide advice and support if needed, see our article on it here.  People in debt are not alone, and if speaking to the loan company in the first place doesn’t help, then these charities should be able to provide useful advice, and help them get back into a good financial situation.

Think before choosing a loan

As is always the main message of this site, taking out a loan is a big decision, and one which should be thought carefully about because the consequences of failing to pay it back can affect the borrower quite significantly.  It is always best to use a company that is well known, is fully regulated and has good reviews online.  It is also important that the interest rates charged are reasonable, why is why it is useful to check the competition, just in case there are other deals out there.

Struggling with Debt? Some Sensible Solutions

Finding yourself deep in debt can be an extremely stressful time.  it can feel like there is no way out and that the situation isn’t going to get better any time soon. There is often no-one to turn to and in some cases when you do turn to someone for help, they just end up taking more money from you.Stressed about debt

Fortunately there are charities and government run organisations that can offer help and advice to people who are struggling to pull themselves out of debt.  The Money Advice Service is very useful, as is Step Change, a debt charity that offers help and advice.  Some of the best advice is to go through all the expenses that you have each month and try to find any that aren’t essential and reduce them if you can.  Saving any money each month means that you are able to put more cash into paying off your debt.  This is better than nothing and at least will give you some extra money each month, even if you don’t start to pay off your debt.

Communicate

Speak to the companies that you owe money to and ask them if they can reduce your payments.  In many cases they might be able to offer you a deal to settle your loan or allow you to make reduced payments for a while.  It is always best to speak to the companies as you might be surprised at what they can do.  They often want to help you pay the loan back because they do not want to lose money that is owed to them.

Use friends and family if possible

If you are thinking of taking out more debt to pay off existing loans, this is generally not a good idea.  Try another route such as asking family or friends if they can lend you money.  They are less likely to have high interest rates on their loans.  Of course you need to make sure that you pay your family or friends back promptly too.

When you are using people for advice, make sure that they are not charging you for their services.  As explained above, there are many other charities that offer free impartial advice and are not trying to make profit from you and others who are already in debt.

Organisation

By organising your money better you will set yourself on the road to being better off financially.  Having a clear plan and knowing what you are going to do with your money and how you are going to do it will make getting out of debt easier.  If you are going from one day to the next without knowing where you are with your money, you are likely to find it difficult to get out of your financial problems.

How to Make the Most of a Loan

One of the issues when it comes to large amounts of debt is the fact that borrowers often don’t use loans for sensible reasons.  They take out a short term loan for a holiday or to pay for a birthday.

Of course it is nice to have money for these events but they can easily be delayed until money is found, and they aren’t essential.  Borrowers need to prioritise their finances and manage them more effectively before thinking about loan finance.

A loan with a high interest rate should be a very last resort, especially if the money isn’t going to be there to pay it back quickly.  Problems occur because high interest rates mean that the debt just gets bigger, so a loan taken out to pay for a holiday means that the holiday will eventually end up costing much more than it originally should have.Loan cash

Unfortunately it is those on low incomes who suffer the most, as they are the ones most likely to take out a loan which could then be defaulted on.  As they default on their loan they incur extra charges and the interest keeps adding up.  This pushes these people who are already on low incomes further into debt and in some cases they find themselves taking out another loan to pay off the original one, which only makes the situation worse.

Getting the most from borrowed money

The best way to use borrowed money is to know that it is going to be possible to pay the loan back quickly.  This way there won’t be much interest accrued on the finance which means it is a cheap way of borrowing money.

It is best to plan ahead before taking out a loan and know that there will be money coming in to pay the loan back fast.  This needs to be a certainty otherwise the borrower will end up paying the loan back in instalments with interest charges being added.

Loans are often useful when they are used to pay for assets that have value when they are re-sold.  If the borrower has any financial difficulties the asset can be sold and some or all of the loan can be paid back.

Managing Debt – Why the UK is so bad at it

The availability of short term loans in the UK has contributed quite significantly to the debt of the country.  As the ease of obtaining debt has increased, the level of education regarding loans and finance has not.

Making debt calculations

If someone is desperate for money to pay a utility bill and it is very easy for them to take out a loan online, there is a large temptation to do this.  If that person is better educated about debt they may think twice about the loan or they may not.  The fact is that they are making a more informed choice than they were before.

Government help

The government is doing more than it has in the past to help people in debt and to start to inform them about their options so they are not left on their own.  This is crucial if people are going to be able to improve their situations.

The problems with short term loans are that interest rates mean that people end up paying back far more money than they originally borrowed, making their debt balance very hard to pay off, especially if they have had to delay payments, which often add extra charges.

Educate people better

The FCA is regulating this and has proposed a cap on the charges so this should help, but it doesn’t get to the root of the cause, which is lack of education.  People need to be educated in schools about the risks of going into debt and how to manage their finances so they don’t end up in debt.

FCA Cap on Payday Loans

In the news today is the story that the Financial Conduct Authority have proposed that there should be a cap on Payday loans from January 2015.Stop for payday lenders

The FCA say that under their proposed scheme a borrower would never pay more back than than 100% of the original cost of the loan.  They say that this makes it clear for customers to understand the charges that they will face when they borrow money.

Late payment cap

Fees for making loan payments late would be capped at £15, rather than whatever a loan company wants to charge.  Again this is to make it clear for consumers, so they can budget more effectively.

The proposals look stricter than many thought, but some still think the FCA needs to go further.  Gilian Guy who is the Chief Executive of Citizens Advice has said that people will still find themselves deep in debt with these measures.  It might mean that the debts don’t spiral out of control as they once maybe would have done, but they are still significant.  She makes the point that borrowers need a cheaper alternative, possibly from banks in the form of an affordable micro loan.

Because borrowers often feel that there is no real alternative to a payday loan, the worry that the FCA has had is that people will turn to illegal lenders who obviously aren’t regulated in any way.  Perhaps they have shied away from stricter criteria because of this.

If borrowers are desperate enough they will always find ways to secure cash.  Alternatives such as logbook loans which don’t receive much publicity compared to payday loans could be another choice for borrowers who own their own vehicles.  The FCA is looking into this kind of finance too so it remains to be seen if they will impose any kind of restrictions on those lenders too.