New cap on payday loan charges

Sky-high interest charges imposed by payday loans could become a thing of the past following proposals from the city regulator to cap the amount lenders can charge.

Young man struggling with finances

The Financial Conduct Authority (FCA) has announced plans to stop payday lenders charging more than 0.8% per day of the amount borrowed.

The FCA also said that no-one should have to pay back more than double the original loan amount. So, if you take out a loan for £100, you will never pay pack more than £200 in total – even if you roll the loan over into the next month.
  
We explain what the changes, due to be implemented in January 2015, will mean for consumers.

Why is the FCA looking into payday lending?

Payday lenders were originally referred to the Competition Commission for an inquiry in June last year, after the Office of Fair Trading said it had identified ‘deep-rooted’ problems in the industry.

As an illustration, at the start of the financial crisis in 2007, National Debtline took 465 calls from people needing help with payday loans, but that number reached almost 21,000 in 2013.

And charity, StepChange said it was contacted by more than 14,000 people last year who were struggling to repay five or more payday loans.

The city regulator was instructed by the Treasury in November 2013 to impose a cap on ‘high-cost short-term credit’ and was given powers to do this under the Banking Reform Bill. The FCA took over regulation of the payday loans and consumer sector from the Office of Fair Trading in April this year.

What impact will the cap have?

The FCA is proposing that interest and fees must not exceed 0.8% per day of the amount borrowed, which should mean more protection and much lower payments for borrowers.

For example, someone who takes out a loan of £100 over 30 days, and makes repayments on time, will now pay no more than £24 in interest, based on the 0.8% cap. Currently, a payday loan of this size would – at a minimum - cost £30 in interest, but in some cases interest costs can be more than £37 per £100 borrowed.

The FCA has estimated that its proposals should save consumers an average £193 a year while the payday loans industry would lose £420m a year.

What about other changes?

No borrower will have to pay back more than they’ve borrowed in fees and charges. So, if you’ve taken out a loan for £50, you won’t have to pay back more than £100. There will also be a cap on default fees set at £15. That means the most you can be charged if you miss one of your repayments is £15, even if it takes you a long time to repay what you owe. In total default fees and interest cannot be more than 0.8% per day of the amount borrowed.

What other protection is there for consumers?

Since July 1, 2014, payday lenders must include risk warnings in their television advertisement and must let customers know where they can get free debt advice.

Loans also cannot be rolled over more than twice. And the amount of the times a lender can take money from a borrower’s account without their specific permission is restricted to two.

When will the new proposals come into effect?

There will be a consultation on the plans between now and September 1. The FCA will publish its final rules in early November and aims to have the price cap in force from January 2015.

How have payday lenders responded to the proposals?

The payday lending industry claims the new clampdown could see the most vulnerable people turning to unscrupulous loan sharks, because they will no longer qualify for payday loans.

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