How Are Short Term Loans Governed and Protected?

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Written by Michael Foote, Insurance and Finance Expert

Michael Foote is the founder of Quote Goat and has over 13 years experience working in the finance, insurance and currency sectors. Since launching Quote Goat he has appeared on TV as well as many of the largest online publications including Forbes, The Telegraph and The Metro. Prior to Quote Goat, he worked in finance in the city for a number of firms including HSBC.

If you find yourself in temporary need of additional finance, short term loans can be a great help. They’re a particularly popular option for students, and those who have experienced an unexpected financial issue which has left them short until their next payday. However, before rushing out and applying for a short-term loan, it helps to know how they are governed and protected.

Are short term lenders regulated?

Not too long ago, the short-term loans industry was largely unregulated. It wasn’t until the Financial Conduct Authority (FCA) took over in 2014 that the industry started to improve. The FCA brought in changes which came into force in 2015, to protect borrowers and put a stop to illegal, unlicensed lenders.

The main changes which came into force included:

  • Ensuring lenders only accepted borrowers who could afford to pay the loan back
  • Ensuring borrowers knew the full costs and risks involved
  • A cap on fees and interest

While restricting who lenders can provide finance to has helped to stop many borrowers from getting into further financial trouble, it’s also made it more difficult for the most vulnerable to get the finance they need.

However, the changes ensuring borrowers are made aware of the full costs and risks of obtaining a short-term loan has really helped. The amount borrowed from short-term loans in just five months after the changes were implemented saw a drop of a massive 35%.

The cap on interest and fees has also helped to make short-term loans more affordable. There’s an initial 0.8% cap on daily interest and fees, making sure borrowers don’t have to pay back more than 0.8% of the amount borrowed each day. There’s also a total cap of 100% ensuring borrowers no longer need to pay back more in fees than the total they actually borrowed.

Are all short-term lenders trustworthy?

The stricter regulations of the short-term loan industry have seen thousands of lenders exit the market. This is definitely a good sign, as the ones who have closed down were the ones which typically charged ridiculously high fees and prayed on the most vulnerable.

However, while tighter regulations have certainly helped eliminate a lot of bad lenders, that isn’t to say all remaining ones are 100% trustworthy. In fact, it’s still extremely important to ensure you’re choosing a well-respected lender such as Smart Pig.

Overall, short term loans are much safer and more affordable than they were a decade ago. However, it’s still important to be aware of the risks and look for a lender that follows the new rules.

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