Payday Loans: a new code of practice

On the 26th November 2012, a new code of practice was introduced to help protect people who take out a payday or short-term loan.

The consumer protections in the new code of conduct were agreed back in May 2012 by the Consumer Finance Association (CFA), the Consumer Credit Trade Association (CCTA), the BCCA and the Finance & Leasing Association (FLA).

These measures could have a big impact on people who decide to borrow money using a payday loan - which has become an increasingly common form of credit in recent times. In fact, according to R3, there has been a rise of approximately 50% in the number of UK adults who say they are likely to take out a payday loan in the next six months.

Not all payday loan providers are subscribed to the new code of conduct, but it should help to ensure that customers of the lenders who are signed up are treated fairly.

If you're struggling to repay a payday loan or any other type of debt, you should get professional advice. Here we'll look at what the new code of conduct will mean for payday loan borrowers.

What is a payday loan?

Even if you've never taken a payday loan out, it's likely you will have heard of them.

Payday loans are loans of smaller amounts, typically ranging from £50 to £1,000, designed to tide borrowers over until payday, when the loan can be repaid.

Payday loans can be a handy way of borrowing some cash over the short term to pay for things such as household repairs or an unexpected bill. However, on the downside, payday loans typically come with high APRs - sometimes in excess of 2,000%. This means that borrowers who roll a loan over to the next month could end up repaying more than they'd bargained for.

How will the code of conduct affect payday loan borrowers?

The Good Practice Customer Charter is designed to set out in a 'clear, concise and user-friendly' way what payday loan and short-term loan customers should expect from their lender.

As part of the code, for new or existing customers, lenders are encouraged to:

  • Act fairly, reasonably and responsibly in all their dealings with the borrower
  • Make sure all advertising and promotional material is clear, fair and not misleading
  • Tell borrowers the full name and contact details of the company providing the loan
  • Not pressure customers into taking out a loan

Before agreeing to let a customer roll over a loan into the next month, payday lenders are encouraged to:

  • Remind the customer of the risks of extending a short-term loan
  • Carry out a sound, proper and appropriate assessment of a customer's finances before extending the term of the loan
  • Clearly explain any extra costs, fees & charges

Payday lenders will also be encouraged to help any borrowers in financial difficulty by:

  • Doing what they can to help the customer manage what they owe, e.g. helping them agree a new repayment plan
  • Freezing interest and charges if a customer is on a repayment plan or doesn't make payments after a maximum of 60 days
  • Not allowing the customer to take out further loans until their outstanding loans have been repaid.

These are just some of the most important protections agreed under the charter. You can click here to read the full list.

Daniel Culpan

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