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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

Software Engineer at GCUF

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Published on September 17, 2018

How Being Smart With Your Money Leads to Financial Success

How Being Smart With Your Money Leads to Financial Success

Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

1. Avoid being “penny wise but pound foolish”

It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

2. When you want something big, wait

Impulsivity can get you in trouble in most aspects of life. Finances are no different.

It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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So, you get the itch.

You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

Here’s where you have to take a step back.

Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

The impulse faded. And you just saved yourself a ton of money.

3. Live smaller than you can afford

You finally get that big raise. And you want to celebrate – and why not?

You’ve been looking forward to this forever. And after all, it was all due to your hard work.

That’s fine, splurge a little. However, make it a one-time deal and be done.

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Don’t get caught in the trap that just because you’re now making more money, you should spend more.

Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

4. Practice smart grocery shopping

Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

Create a grocery budget

Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

Make a list… and never deviate

Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

These impulse decisions will lead to overspending, which will derail your grocery budget.

Eat before going grocery shopping

It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

This makes it much easier to stick to your grocery plan.

5. Cancel your gym membership

Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

The average gym membership costs around $60 per month. That’s $720 a year.

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Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

It’s baby steps… And baby steps can start now!

I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

Featured photo credit: Unsplash via unsplash.com

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