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Why Payday Loans Were Capped

Why Payday Loans Were Capped

Until the FCA (Financial Conduct Authority) stepped in at the beginning of 2015, there was no cap on the fees and interest associated with the high-cost loans known as Payday Loans. It was at that point that the FCA capped the interest and fees at 0.8% and capped the total payback amount for any loan at double the amount of the original loan. It goes without saying that this unceremonious capping by FCA points was welcomed by all but the payday loan companies.

A Vulnerable Demographic, a Destructive Cycle

The “hook” for a payday loan is the offer of quick cash when the borrower is in a jam, and that cash is contingent on the proof of a regular paycheck, which is intended as security against the loan. The catch with these loans has been the high interest rates that have historically been charged to them, often rendering the borrower incapable of getting out of debt. The loans build interest and roll over and grow rather than shrink as the borrower struggles to pay them back.

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The most common cycle seen with payday borrowers has been a need to take out another short-term loan in order to make payment on the original loan and its interest, incurring yet another layer of fees and interest. This cycle could continue indefinitely, resulting in circumstances as extreme as bankruptcy.

Part of the problem with the uncapped interest rates came in the form of borrowers who felt they had no other options but to opt for payday loans—in other words, a vulnerable target demographic. Although these high-interest and short-term loans may not make financial “sense” (paying a large sum in order to have money a little sooner), many people find themselves in situations where the issue of “sooner” is paramount, trumping the other considerations that might have come into play in less desperate circumstances.

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Under the old system, a borrower might end up owing amounts exponentially greater than the amount originally borrowed, continually taking out more and more to cover the ever-increasing amounts that come due with their ever-accruing interest.

A Cap to the Problem

The FCA took note of this unmanageable cycle, and took action because it left consumers without any viable solution to quickly mounting debt. The FCA’s Christopher Woolard noted that “for those people taking out payday loans, they should be able to borrow more cheaply” with the new regulations in place.

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The new regulation was two-fold, including not only a numerical limit to the rate of interest that could be applied to this type of loan, but also a stricter set of regulations on how often a loan could be “rolled over” and continue to accumulate interest charges. At the end of the day, a borrower who is unable to repay the loan immediately can keep accruing interest, but only until the total amount owed reaches the equivalent of twice the originally borrowed amount.

Where a loan of one hundred could previously balloon to a debt of hundreds or even into the thousands, that same loan today cannot overreach the mark of two hundred–even with interest added on a defaulted loan.

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The FCA’s chief executive, Martin Wheatley, observed with some satisfaction that “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control,” meaning that “No consumer will ever owe more than double the original loan amount.” It is the very foundation of the new regulation, that not only will ensure that the interest owed doesn’t spiral out of control, but it will also make sure the total amount accrued will be limited to a manageable amount.

Additionally, the new regulations keep some people from taking out loans who have no hope of paying them back, thus setting off a downward spiral for the borrower in question.

The old tendency of payday loans to spiral out of control has been contained by the new cap and regulations.

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Tanvir Zafar

The founder of ISU Technologies, passionate in writing about entrepreneurship, work and technology.

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Last Updated on March 4, 2019

How to Use Credit Cards While Staying Out of Debt

How to Use Credit Cards While Staying Out of Debt

Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

Do Not Treat Credit Cards as Your Funding Sources

Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

Make Sure to Always Pay Off Balances in Full Each Month

The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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Using Credit Cards with Rewards

Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

Featured photo credit: Artem Bali via unsplash.com

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