Now that summer is over and students are back in school, the attention of personal-finance experts often turns to the plight of university students who are struggling to find ways to save money. Being “out in the world” for the first time often comes as a shock for new university students, and even with maintenance loans and grants many students are finding it quite difficult to maintain a decent standard of living.
Accordingly many will be tempted to turn to payday loans – short-term loans for relatively modest amounts of money that are generally easy to get. Unfortunately the ease of borrowing is more than offset by the high interest rates: the very reason that so many experts advise students against turning to payday lenders. In fact the counsel to avoid payday loans at all costs often makes the short list for those student money-saving tips pieces that are so prevalent this time of year.
Fortunately there are other choices. One sound way to help get your finances under control is to get set up with a good student bank account with overdraft privileges. And if you find yourself exceeding your overdraft limit and are having difficulty making ends meet, contact the National Association of Student Money Advisers (NASMA), who will be able to advise you on the appropriate alternatives.
An industry under scrutiny
There is good reason for all of the cautionary advice about payday loans, which have come under intense scrutiny in recent years. In fact when the Financial Conduct Authority (FCA) took over the consumer credit sector in April of 2014, many dire predictions were made about the future of the payday lending industry. New regulations that went into effect in January 2015 stipulate that the cost of any new payday loan, including interest and fees, must not exceed 0.8 percent a day of the amount borrowed. Moreover fixed default fees cannot be higher than 15 pounds and the total cost of the loan must not exceed the total amount borrowed.
In late 2014, remarking on the regulations, Peter Crook, CEO of consumer credit provider Provident Financial Plc, said, “The FCA’s own research predicts 99 percent of payday lenders will go out of business – there are over 400 payday loan firms, there will be only four left.” He added that the consumer demand to borrow money would still be there and he expected it to migrate to the types of loans that his own company provides.
Now that we are well into the fourth quarter of 2015, are these dire predictions coming true? The new regulations have certainly made a dent in the consumer credit industry and in particular the payday loan sector. According to the Telegraph, thousands of payday lenders shut their doors before even applying for a licence under the FCA’s tough new rules. And more than 5,000 firms that had received interim approval from the FCA decided not to apply for full authorisation in the early months of 2015.
Nearly 17,000 of these firms were required to submit their application by 1 April 2015, but 5,172 failed to do so, which required them to close down that line of business. However, another 6,900 previously unlicenced firms also applied to enter the sector, though they may need to wait as long as a year before getting approval.
The industry is far from dead but clearly it is in flux.
If you are a university student it’s best to listen to advisers who caution that you should avoid payday loans if at all possible. University students are eligible for various sorts of benefits and at the very least, as indicated above, there is financial counseling available to help the student in need explore alternatives to payday loans.
If all else fails and you feel backed into a corner, however, a payday loan might be a feasible option for you if you don’t need a huge amount of money and can pay off the loan in the allotted time frame. It’s also important to carefully research and compare lenders. Although payday lenders are not as plentiful as they once were, and their numbers are shrinking, you still have an array of choices so you should evaluate their terms and see how the people who have actually used these lenders rate them. As well, you should make a commitment to pay back the loan on time and not rely on rolling it over, because you will just be piling onto your debt total.
For a university student a payday loan should always be considered a last resort but in a time of dire need, it can be useful if handled responsibly.