2nd January 2015
The cap on payday loan penalties has come into effect from today, meaning no-one will be charged more than twice what they have borrowed.
The City regulator, the Financial Conduct Authority (FCA), has implemented tougher rules on payday lenders. It has capped loan rates at 0.8% per day and said that no-one will have to pay back more than twice their loan. Even if a borrower defaults on a loan the charges will be capped at 100% of the original loan.
A one-off default fee of £15 will also be introduced.
There had been growing concerns about payday debts spiralling out of control, with lenders providing borrowers with more loans to try and pay off existing debts.
Now the regulator wants to ensure that no-one is caught in the debt spiral and that lenders are not recklessly lending money to those who cannot afford to pay it back.
Christopher Woolard of the FCA said: ‘For those people taking out payday loans, they should be able to borrow more cheaply from today, but also we make sure that people who should not be taking out those loans don’t actually get them.’
A number of payday lenders have already closed in anticipation that the new rules would damage their business and the amount of money being loaned by the industry has halved over the past year.
Russell Hamblin-Boone of the Consumer Finance Association, the trade body for payday lenders, told the BBC: ‘There will be fewer people getting loans from fewer lenders and the loans they get will no longer be the single payment loans for less than 30 days.
‘The loans that are available now will be for three months or more and they will be at slightly higher values as well. Very few loans will be rolled over.’
According to FCA research, 70,000 people who would have qualified for a payday loan will no longer do so under the stricter rules. Woolard said the regulator will monitor the situation closely to ensure that those borrowers who are now excluded from paydays loans do not turn to loan sharks.
Richard Lloyd, executive director of consumer group Which?, said: ‘The regulator has clearly shown it’s prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review.
‘It is now time to turn the spotlight on unfair practices in the wider credit market. We wan to see an end to excessive fees that also make it hard to compare different loans including those charges for unauthorised overdrafts and credit cards.’