15th July 2014
Payday lenders interest charges are to be capped at 0.8% a day from January next year. The Financial Conduct Authority plans to introduce a charge cap that will mean borrowers will not have to pay back more than twice the amount they borrow.
The regulator says that someone taking out a typical loan for 30 days and repaying on time will not pay more than £24 per £100 borrowed amounting to around 0.8% a day.
The regulator is holding a short consultation about the price cap. The watchdog says it expects the cap to lead to a reduction in lending and some customers who have previously taken out high-cost short-term loans will no longer get them. However, it adds “We believe that, apart from for a short initial period, they will be better off without loans”.
The regulator says it tested a range of charges between 0.4% and 1% per day. It found that 0.8% cap per day lowered prices for borrowers who pay back their loans on time. The FCA argues that because the interest is calculated as a daily rate, it means the cost of the loan is directly proportionate to its duration.
Caps on default fee and default interest
The FCA says it is reasonable not to prevent firms making a charge as they incur costs when a borrower fails to repay on time, so long as “they are not excessive and they treat borrowers in default or arrears difficulties with forbearance and due consideration”.
It is imposing a £15 cap on default charges which it says reflects the need to provide consumers with an incentive to pay back on time, whilst also providing the right incentive to firms by not rewarding failure to properly assess affordability.
The FCA also tested a range of total caps from 50% to 200% and decided on 100% of balances protecting consumers and allowing firms to continue offering loans for different lengths of time.
Since 1 July, payday lenders have been subject to new rules, which limit roll-over loans, include more affordability checks, and controls designed to stop lenders taking money from people’s bank accounts.
Which? executive director, Richard Lloyd, says: “It’s good to see the regulator tackling the eye-watering cost of payday loans, especially the excessive default charges that sting struggling borrowers and lead them into spiralling debt.