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One of the fastest growing internet industries over the last few years has been in offering loans online. A large number of companies have sprung up across the globe offering different lending sources to people whose needs are not being met by traditional lending sources such as banks, credit unions and building societies.
The online loans industry has not been completely without bad press. As in any industry or business field, a few bad apples can often spoil it for others or mean that reputable companies get tarred with the same brush. There were some very public cases of short term loan lenders charging extortionate APR’s (annual percentage rates) and fees, particularly with direct payday lenders.
In 2015/16 there were 3216 complaints in the UK about short-term loans, a big jump from the 1157 complaints registered in 2014/15. Without doubt, there were some lending companies exploiting people that either didn’t know any better or couldn’t get any better. The financial crisis of 2008 forced banks to tighten their lending policies. This move left large swathes of the general public unable to meet their personal and business financial needs. Many people found themselves needing to pay an urgent bill and not being in a position to do so. The downturn in general wealth combined with the tightening of lending dramatically increased the supply and demand of and for short term online lenders.
The advancement of the internet coupled with growing lending demands meant that the online loans industry flourished very quickly and almost unchecked. Regulation was eventually introduced by the Financial Conduct Authority (FCA) in 2015, which effectively capped what people could borrow and what fees and penalties they could be charged. Practices were cleaned up and approximately half of the direct payday lenders disappeared within a year. Payday loan rates were capped at 0.8% per day of the amount borrowed, and no-one now has to pay back more than twice the amount that they borrowed.
The regulation made taking a short-term loan a bit more difficult, but for the consumer’s benefit. Stricter affordability checks were brought in that meant less people were defaulting and less penalty fees were being paid. More and more people have now been taking online lending via instalment loans with scheduled repayments, as opposed to the costlier loans offered by direct payday lenders.
Even with all the tightening of regulation, affordability checks and increased consumer protection, taking out loans online remains a relatively easy task. However, the protection offered to the borrower is and the terms available to them is far better than it was just a few years ago. The number of defaults has fallen in direct correlation to the stricter affordability checks implemented. This has enabled lending companies to be able to lower their rates and charges because they have fewer bad debts and incur less costs in debt collection.
So, to answer the question ‘are offering loans online a licence to print money?’ The answer is no, not any more. Companies are now regulated, rates and charges capped and the borrower has much more choice and protection than previously. It is still a lucrative industry for the lender or there wouldn’t be as many companies offering such lending as there are. However, the ability to behave how they want and charge what they like has thankfully ended.
The need for short term loans is as great as ever, but regulation has made offering loans online anything but a licence to print money. An industry clean-up, particularly in rate capping has meant that those needing a short-term loan are in a better position than ever before.