Payday Loan Charges to Face Tighter Control

November 12, 2014

Luke-Notley small (Custom)The Financial Conduct Authority (FCA) has today announced a cap will be placed on the amount that payday loan lenders can charge their customers. The new ruling will restrict payday loan lenders to charging customers a maximum of 0.8% a day. Additionally, there will be a £15 limit for default charges placed on payday loans.

The new regulations will come into effect in January 2015 and have been designed to ensure borrowers will never have to pay back more than twice what they have borrowed.

The FCA chief executive, Martin Wheatley, explained: “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.”

The New Measures:

  • Initial cap of 0.8% a day in interest charges
  • A cap of £15 for one-off default charges
  • Total cost cap of 100%

However, Russell Hamblin-Boone, chief executive of the Consumer Finance Association, is concerned these tighter restrictions could have a negative effect upon borrowers: with fewer legal lenders willing to meet these new requirements, debtors may be forced to turn to loan sharks.

“We’ve restricted, for example, extending loans, rolling over loans, [and] we’ve got tighter checks on people before we approve loans. This [cap], if you like, is the cherry on a rather heavily-iced cake.

“We’ll inevitably see fewer people getting fewer loans from fewer lenders. The fact is, the demand is not going to go away. What we need to do is make sure we have an alternative, and that we’re catching people, and that they’re not going to illegal lenders.”

Mr Wheatley responded by demonstrating the FCA’s figures which determined that only 7% of current payday loan borrowers would be ineligible for payday loans under the new restrictions, and suggested this minority would merely continue without securing a loan from any source. The FCA maintain they only anticipate 2% of current payday loan lenders will resort to seeking the help of a loan shark.

Gillian Guy, chief executive of Citizens Advice, believes this ruling represents an opportunity for banks and other lenders: “People who are in a position to borrow need a responsible short-term credit market. A vital part of this is greater choice. High Street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.”

If you have taken out a payday loan before these regulations have come into effect and are struggling with the repayments or charges, you may be suitable for a debt management plan. Visit the InControl debt management plan page or call our dedicated team on 0800 072 6623.