In recent years, there has been an increase in the demand of for short-term loans in the United Kingdom, especially payday loans, and the market for these loans seems to be flourishing. Payday lenders in the UK offer these high-interest and short-term loans to consumers, suggesting that they pay back the money when they receive their next pay cheque, usually within a month. Unlike typical secured and unsecured loans, these loans are solutions meant to be borrowed for a short-term by those facing immediate financial troubles. Generally, these loans can be borrowed for amounts starting from £100 up to £1,000. All payday lenders operating in the United Kingdom are licensed from the Office of Fair Trading (OFT).
How Do Payday Loans In The United Kingdom Work?
Applying for payday loans in the UK is usually easy. Unlike traditional bank loans, the process is much quicker and borrowers can fill the application either online or at a payday shop. In general, the process to obtain such a loan in the UK is quick and straightforward as long as the borrower has a bank account in which electronic money transfers are handled, and a permanent job. After the processing of the application, the approval takes place at the same time, and the lender deposits the money directly into the borrower’s bank account within no time.
Some payday lenders may use direct debit facilities as a result of which they are able to control the repayment of the loan more effectively. As an alternative, the lender may take a post-dated cheque from the borrower so that the eventual repayment of the borrowed money with the addition of interest is covered beforehand. According to estimates, the average size of payday loans typically borrowed in the United Kingdom is £300. Payday loan companies can charge as much interest rates as they want to since there are no restrictions, although stating the effective annual percentage rate (APR) is mandatory by UK law.
What Enforcement Methods Do Payday Lenders Use?
People who borrow these loans are required to pay back the amount when they receive their next pay cheque. The maturity date of the loan concurs with the borrower’s next payday, which is generally 30 days. On this day, the borrower’s account is debited by the lender if a post-dated cheque had not been obtained earlier, and the principal amount of the loan with the addition of the acquired interest is received.
Some payday lenders also use direct debit facilities. This way, if the loan is defaulted, the lender can try to debit the money from the borrower’s account without any agreement with the consumer regarding amounts or dates. However, payday lenders have received a warning from the OFT to avoid misusing their direct debt facilities to alter the amount or date at which the borrower has to pay back the loan.
In the United Kingdom, there are particular legal requirements that payday lenders must comply with before they can legally offer payday loans. These legal requirements are set out in the Consumer Credit Act 1974 (CCA 1974). This is the reason payday lenders cannot operate unless they hold a credit license issued by the OFT.