The United Kingdom is contemplating a plan that has been devised by many experts already. The idea is to cap the payday loan interest rates in an effort to help people from excessive debt, the payday loan trap and other problems that can cripple life. Released on October 3rd, the news outlets were quick to seize on the economics of the problem. It would make sense that UK authorities want to cap the interest rates, but the method that want to do it is of contention among many experts.
Do Payday Loan Caps Work?
The biggest question that people have been asking after the news from the UK is whether or not the caps on payday loans actually work. For most people, the payday loan interest rate payments are excessively high, but still cover the risk. The cash advance lenders are unable to make money (and therefore unable to lend) if they are not able to charge as high as the market demands.
The risk that these companies take on as a result of the payday loans makes it very difficult to make money. They typically get paid back by only a small portion of the individuals that borrow money, which leads them to need a higher interest rate on those that do.
The payday loan cap has to be very well placed in order to work. Even then, it will kill some of the smaller companies that are not competitive. The cap will work to a degree for those who are trying to prevent excessive payday loan debt, but in the long run there are still many questions and concerns.
Long Run Payday Loan Debt
In the long run, there are many issues that regulators and business owners are worried about. The excessive interest rates will hurt citizens, but it is a need for many people. The politicians in the UK have obviously followed populist sentiment, which is in uproar after many payday lending companies have been shown to earn millions every day.
In any case, the people who are most worried about the payday loan cap are the companies themselves. They have a lot to lose and their competitiveness can be eroded with a move like a payday loan cap. There are many aspects of the cash advance business that are not moral, but offering money as the market demands it might help to save lives more often than most people think.
Grounded Payday Caps
There are many aspects of the cap on cash advances that people don’t like or find useful. Some even consider it highly dangerous to continue at the current pace. However, there are some grounded ways of capping loans in the UK that some governmental offices have already devised. The FCA has proposed tougher use of advertisement bans in order to help people in the country.
Such a move will not change the way that the lending companies do business, but it will change their deceptive practices that can engulf many citizens in debt. The FCA is pursuing this policy with vigor, but it is a matter of time before payday loan companies start to fight back. With the advertising ban itself there are grumbles, but a cap on interest rates will be an even bigger fight.
