FCA confirms payday loans charge cap

Anyone taking out a payday loan from next year will never have to pay back more than twice the amount they’ve borrowed, the City regulator confirmed today.

payday loans

Payday loans are short-term loans designed to tide you over until your next payday, but interest rates and fees can be exorbitant.

The Financial Conduct Authority (FCA) first announced proposals to cap the amount payday lenders can charge back in July.

Following a consultation period, final rules have now been published and will come into effect from 2 January, 2015.

What the new rules mean

As well as the cap on the amount you have to pay back overall, the FCA will introduce several other measures next year to protect those who use payday loans.

There will also be a cost cap of 0.8% in interest and fees per day, so no payday lender can charge more than this per day for either new loans or loans which have been rolled-over.

If you are struggling to repay a payday loan, you will never be charged fees of more than £15.

Strike the right balance

Martin Wheatley, chief executive officer at the FCA, said: “I am confident the new rules strike the right balance for firms and consumers. If the price cap were any lower, then we would risk not having a viable market.

“If you are struggling to repay a payday loan, you will never be charged fees of more than £15...”
Any higher and there would not be adequate protection for borrowers.

“For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”

Rule changes

Once the rule changes come into effect, someone who takes out a loan for 30 days who repays on time won’t pay more than £24 in fees and charges per £100 borrowed.

Under current rules payday loan of this size can cost £30 in interest, but in some cases interest costs can exceed £37 per £100 borrowed.

Gillian Guy, chief executive of national charity Citizens Advice, said: “This is a step towards fixing a market that hasn't been working for consumers. Payday loan firms should only lend to people who they know can afford to pay back the debt, and must point those who can’t towards free debt advice.”

According to Citizens Advice, 62% of 17-25 year olds who use high cost credit and have come to the charity with a debt problem used payday loans.

Welcome development

Although the changes have been broadly welcomed, some believe the FCA could have gone further.

Martin Lewis, founder of consumer website MoneySavingExpert.com, said: "After years with a drought of regulation, finally we have been given some water. It doesn't fully quench the thirst, and it's taken far too long, but it's welcome.

"It's somewhat disappointing the FCA has chosen to keep the rate at the high level of its original proposals. Its argument that 100% is simpler for people to understand is a strange one. I believe people would've preferred the ‘more complex’ but cheaper cap at 50% to 75%.”

Other protection

There are other safeguards already in place to protect payday loan customers.

Since July this year, payday lenders have not been able to roll loans over more than twice. They also can’t take money from your account more than two times without permission.

They must also include clears risk warnings in their television advertisements and must also inform customers where they can get free debt advice.

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