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Home > Loans > Payday Loan > Payday Loan Guides > How the payday loan market in the UK compares to other nations

How the payday loan market in the UK compares to other nations

The payday loan market is alive and thriving in the UK. In fact, it is rapidly growing industry that continues to double each and every year, with nearly 2.1 million UK consumers taking out approximately £2 billion in payday loans in 2012 alone. Although payday lenders in the UK are required to visibly state the APR that they charge, the interest rates have yet to be capped like they are in many other countries around the world.

Currently, there are no restrictions on the amount of loan interest that UK payday loan companies can charge. With the average UK payday loan costing £25 to £30 for every £100 per month, it is not surprising that many UK residents often find it difficult escaping the payday loan debt cycle.

The rise of payday loans in the UK

Payday loans made their way across the pond to the UK from the United States around five years ago, and they have since spread across the land as recent economic uncertainty only appears to worsen. They provide individuals who are down and out on their luck or in need of fast cash with short-term loans for small amounts of capital ranging from £100 to £500. Typically, the loans are directly debited from a person’s account in two weeks when they receive their next paycheck, which is how payday loans derived their name.

UK payday loans unveiled

Similar to American payday loan lenders, most lenders in the UK take advantage of the lack of a payday interest rate cap to charge their customers up to £35 for every £100 that is borrowed. This means a typical £300 loan could end up costing someone £405 after only a two-week period.

Since the UK also has no legal limitations on rolling over payday loans, a £300 loan could cost £660 if it was rolled over for six months, which often occurs due to the low-income of most payday loan seekers. Thanks to a lack of interest rate restrictions, many payday loan companies charge an average APR of 1350 percent, which is a staggering figure to say the least. However, it is not unusual to see payday lenders charging upwards of 2,000 percent or more.

If a UK resident fails to pay off their payday loan, this huge APR can easily become a reality in only a matter of a few months. As the growing number of payday loan originations suggest, many individuals apparently do not understand the high cost of payday loans in the UK.

Head to head: UK vs. Australian payday loans

While other Australian states, such as New South Wales, Victoria, and the ACT, have decided to place an interest rate cap of 48 percent on payday loans, Queenslanders continue being hit with payday loan interest rates from 200 to 1,300 percent. Lagging behind these other populous Australian states, the Queensland government has obviously fallen behind on implementing the same payday loan regulations that have proven successful in other parts of Australia.

According to the Queensland government, it needs more time to devise regulations that would prove beneficial to both lenders and consumers. Thus, it is not surprising that many consumer groups believe the state’s relaxed laws have drastically contributed to the spread of payday lending throughout the state. However, when compared to the UK’s frequent APRs of 2,000 percent or more, it seems the least regulated of all of the Australian states still has lower payday loan interest rates than similar short-term loans in the UK.

Behind the Japanese payday loan system

Similar to many Australian states, the Japanese government has had a cap on payday loan interest rates since the beginning of the 21st century. After experiencing a sharp rise in loansharking and related crime, Japan was able to control the spread of the growing payday loan industry by capping interest rates at 20 percent. This makes it an affordable short-term solution for nearly everyone and promotes better financial management.

The current UK payday loan system is nearly identical to how payday loans operate in the US. As a result of this lack of regulation, the popularity of payday loans is increasing in each country, while Australia, Japan, and other countries have utilised regulation and interest rate caps to successfully manage the growth of the payday loan industry and protect the financial well-being of their citizens.

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