Having credit companies lending money autonomously means that every company does it differently. If a user cannot repay a loan, but is still given one, this results in a spiralling loan where the interest makes the loan mathematically impossible to repay.
However, this is exceptional and did not happen to the vast majority of users even before the change of regulation. Risks as such are now foreseen by the FCA (Financial Conduct Authority) and not by the OFT (Office of Fair Trading).
One way of preventing spiralling would be to limit the amount of money you borrow depending on how much money you could pay back. This means that you could hardly spiral your loan out of control. Let us not forget that there are websites and agencies that offer help and advice to people who need assistance (add links). Spiralling is bad not only for users but for companies too – bad debt means higher risks, resulting in stricter control over repayments, higher interest and difficulty in getting money.
Companies now face restrictions on collecting money. CPA (Continuous Payment Authority) used to give lenders the right to access users’ accounts and make payments on the users’ behalf. CPA is a method of easing payments and making transactions faster. Of course the original idea of CPA is good and works in practice but until the changes of regulation, having the authority to make such payments was open to a certain amount of misconduct by some companies.
So instead of forcing payments on someone’s behalf, lenders will now contact users after two failed attempts of CPA to make sure everything is okay. Not only that, you can take control and tell companies how much they can have at a time. Bank accounts are now much more secure and users have control over what is happening.
Be aware! New regulations expects companies to keep users well informed of the risks of spiralling so companies have to make double sure users are doing fine and are in control. Not only that, lenders now have to offer help before giving another loan to the same person.
The UK`s Financial watchdog is there to ensure that companies won’t take advantage of financial vulnerable people with poor practice. Making lenders care more about users is all about making payday loans a nicer experience for both sides and improving the way companies operate. Better ethics and better care, less bad debts and less loses for businesses should result in better deals and better interest.