How Many People in the UK Use Payday Loans Each Year?

According to the most recent Financial Conduct Authority’s (FCA) Consumer Credit Panel, approximately 5.4 million payday loans were issued in the UK in 2018. 

Payday loans are short-term, high-interest loans often used as a last resort for individuals facing unexpected financial challenges. Payday loans can provide a way of getting cash quickly, but their convenience can come at a cost. 

Below we will explore what the payday loans landscape looks like in the UK, including how the industry is regulated and alternative forms of borrowing.   

What Are The Features Of A Payday Loan?

These loans are typically small, unsecured loans (e.g used to borrow £300, £500 or £1000), and are designed to bridge the gap until the borrower’s next payday. The ease of access, quick approval process and, in some cases, no credit checks have contributed to their popularity in the UK, especially for borrowers with a bad credit history.

Who In The UK Is Using Payday Loans?

Contrary to common stereotypes, the use of payday loans in the UK is not confined to a specific age group or income bracket. Individuals from various socio-economic backgrounds, including those with stable incomes, find themselves turning to payday loans for unexpected expenses.

A significant portion of payday loan users are between the ages of 25 and 34. This demographic often faces financial challenges associated with housing costs, student loans and other living expenses. 

However, older age groups and individuals with higher incomes are not exempt from seeking payday loans. Payday loans are needed for various reasons including:

• Medical bills
• Weddings and funeral costs
• Travel expenses
• Your – or your children’s – education
• Debt Consolidation 
• Emergency Expenses

Geographically, the North West and North East regions have the highest numbers of loans in the UK. Greater London stands out with higher average loan values. This is attributed to the higher cost of living in the capital, where residents may need to borrow larger loan amounts to address their financial challenges.

What Are The Drawbacks Of Payday Loans For Borrowers In The UK?

While payday loans offer immediate relief, they have a number of drawbacks and the potential to trap borrowers in a cycle of debt. The short repayment period and high interest charges can lead to borrowers struggling to repay the loan, resulting in borrowers having to take on additional loans to cover the original debt.

In response to concerns, the FCA has implemented regulations to cap the interest rates and fees charged by payday lenders. These measures aimed to protect consumers from defaulting on their loan or falling into a debt spiral, encouraging responsible lending practices within the industry.

How Are Payday Loans Regulated In The UK?

The regulatory measures introduced by the FCA have had a noticeable impact on the payday loan landscape. Since the implementation of these regulations, there has been a decline in the number of payday loan applications (there were an estimated 10 million per year in 2013) and a shift towards more responsible lending practices. 

Lenders are now required to conduct thorough affordability assessments before approving loans, ensuring that borrowers can repay without facing financial strain. Additionally, the cap on interest rates prevents lenders from imposing excessive charges, providing consumers with greater protection.

The regulations the FCA put in place include: 

• The total amount charged, including fees and interest, must not exceed 0.8% per day. Lenders are restricted from charging more than 80 pence a day for every £100 borrowed.
• The maximum default fee allowed is £15.
• A cap on the total cost of the loan is set at 100% of the loan amount. For example, if £100 is borrowed, the total repayment, including interest, fees, and capital, must not exceed £200.

What Alternatives To Payday Loans Are Available In The UK?

• Use Your Savings: If you have savings, consider using them instead of opting for a payday loan. Using savings is generally more cost-effective, as the interest earned on savings is typically lower than the interest charged on loans.
• Borrow from Family or Friends: Avoid costly interest charges by borrowing from family or friends. In this arrangement, clear communication is needed to establish a repayment plan, ensuring you maintain healthy relationships in the event of any repayment issues.
• Advance On Your Wages: Requesting a wage advance from your employer or a short-term advance if claiming benefits can provide you with some quick cash.This type of loan is typically repaid directly from your future wages or benefits.
• Credit Cards: Consider a credit card for your immediate financial needs. Paying off a credit card bill within 30 days avoids interest charges, making it a potentially more affordable borrowing option.

Summary

While payday loans remain a viable option for UK borrowers facing immediate financial challenges, the industry has undergone significant changes with the introduction of regulations aimed at protecting consumers.

If you are considering taking out a loan, Proper Finance can help explore secured loan options. Fill out the online form today for instant response on your loan application.