If you are looking for a payday loan, the sheer number of options available can feel overwhelming. Do you go through a payday loan broker or straight to a lender? And what actually is the difference between brokers and lenders?
In this article, we’ll take a closer look at how payday loan brokers work and separate the myths from the reality, so if you do decide to take out a payday loan, you will have a clear idea of what may work best for you. However, don’t forget that there are advantages and disadvantages with Payday loans.
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Myth 1: It Costs More to Take out a Loan Through a Payday Loan Broker
Many people believe that they have to pay a fee, or an additional charge of some kind, on their loan, if they use a loan broker.
Good loan brokers should never charge you a fee. It is actually considered bad practice for loan brokers to charge for their services, even though they can help find the best loan deals.
Most loan brokers such as Cashlady, earn their money by charging the loan providers commission.
Indeed, the relationships that loan brokers have with loan providers, can sometimes mean that they are able to get more attractive deals for those looking to take out a loan.
Always check the small print of any loan broker that you are considering using, to ensure that you will not end up paying a fee for them to find you a loan.
Myth 2: Loan Brokers Lend Money
Loan brokers do not lend any money. Their purpose is to find the best deal for you, as the borrower, as well as to introduce lenders to customers.
It is the loan provider that lends money to borrowers.
Essentially, a loan broker is a kind of introduction service to introduce customers to different lenders who may be able to lend them money.
Myth 3: Going to a Payday Lender Directly is Much Quicker
It’s a common misconception that applying for a loan directly with a payday lender will result in you getting your money much more quickly, than if you apply through a loan broker.
This is not always the case. If time is of the essence, a payday loan broker can check each lender’s lending criteria against your application and match you to the loan provider who is most suited to you. Your application is then sent to these lender/s.
This process could result in saving you time compared to making an application directly with a lender, as you may not waste time applying to lenders whose lending criteria could mean that you may not get a loan with them anyway.
Myth 4: Payday Loan Brokers are Exactly the Same as Comparison Sites
Comparison sites and loan brokers are not the same thing.
A comparison site will show you a list of lenders and their potential offers. After selecting an offer, you are then normally taken to the lender’s website to apply directly with them. These websites can be an invaluable source for those wanting to do market research before applying for a loan.
Conversely, loan brokers are there to match customers to potentially suitable lenders.
Myth 5: You Can Only Find the Best Deals Through Loan Brokers
Loan brokers are not the only option when it comes to finding the best loan for you.
When researching different lenders, it is important that you set aside enough time to make sure that you fully understand a provider’s lending criteria and know exactly what they are offering, so that you can find a lender that may provide you with a loan on terms that are suitable for you.
There are various myths surrounding payday loan brokers, many of which we’ve tackled for you today. As with any big financial decision, it’s important that you do your research and fully understand what you are signing up for, before committing yourself to any financial product. When considering taking out a loan, it is vital to ask yourself if you really need to borrow money.
Loan brokers can provide a valuable service to those looking for a payday loan. Just remember to make sure that you are using a reputable loan broker who won’t charge you any fees.
How do Loan Brokers Earn Their Money?
Having looked at some of the myths surrounding Payday loan brokers, here are some of the facts about this industry.
Loan brokers in the UK typically earn money through the following methods:
- Commission from Lenders: The most common way loan brokers earn money is by receiving a commission from the lenders for each loan that is originated through them. This commission can either be a fixed fee or a percentage of the loan amount.
- Fees from Borrowers: Some brokers may charge an upfront fee to the borrowers for their services. This fee may cover the cost of evaluating the borrower’s creditworthiness, completing paperwork, and liaising with lenders.
- Ongoing Commissions: For loans that have a longer duration, brokers might receive an ongoing or ‘trailing’ commission over the life of the loan. This is particularly common in the mortgage industry.
- Cross-Selling Financial Products: Brokers may also earn money by selling related financial products like insurance, which could be bundled with the loan.
- Referral Fees: Some brokers earn money by referring clients to other financial service providers, like financial advisors or insurance companies, and receiving a referral fee in return.
These revenue streams can sometimes create a conflict of interest, which is why regulations like the Financial Conduct Authority (FCA) guidelines in the UK aim to ensure transparency and fairness in the industry.
How are Payday Lenders Regulated in the UK?
Payday lenders in the UK are regulated primarily by the FCA, which sets rules and guidelines to ensure consumer protection, transparency, and ethical conduct. Here are some key aspects of how payday lenders are regulated:
- Authorisation and Licensing: Payday lenders must be authorised and licensed by the FCA to operate. The FCA assesses the business model, financial stability, and the competence and integrity of the firm and its executives before granting a license.
- Interest Rates and Fees: The FCA has imposed a cap on the daily interest that can be charged by payday lenders. There is also a cap on the total cost of the loan, which means that borrowers will never have to pay back more than twice the amount they borrowed.
- Affordability Checks: Lenders are required to conduct detailed affordability checks to ensure that borrowers can afford to repay the loan. They must verify the borrower’s income, expenditure, and financial commitments.
- Information and Transparency: Lenders must provide clear, transparent information about the terms of the loan, including the interest rate, any fees, and the total amount repayable. They must also provide information on the risks associated with payday loans and the implications of non-payment.
- Collection Practices: The FCA sets guidelines for fair treatment of customers, especially when it comes to debt collection. Lenders are not allowed to use aggressive or misleading tactics to collect debts and must offer struggling borrowers more time and flexibility to repay.
- Complaint Handling: Payday lenders must have procedures in place for customers to file complaints, and they must respond to complaints in a timely and fair manner. Customers who are unsatisfied with the lender’s response can escalate the issue to the Financial Ombudsman Service.
- Continuous Payment Authority (CPA): While lenders can use CPA to collect repayments directly from a borrower’s bank account, there are restrictions. For example, if a CPA fails twice, lenders are not permitted to attempt the collection again without obtaining new authorization from the borrower.
- Advertising and Marketing: The FCA also regulates the advertising and marketing of payday loans to ensure that they are not misleading and that they clearly disclose the costs associated with the loan.
- Data Protection: Lenders must comply with data protection laws, ensuring that customers’ personal and financial information is securely stored and not misused.
Failure to adhere to these regulations can result in severe penalties, including fines and the revocation of the lender’s license.