The end of payday loans?

photo by @TheFCA

Graph – photo courtesy of @TheFCA

To prevent borrowers from being ripped off, the City regulator has imposed a new price cap for payday loans. The Financial Conduct Authority’s (FCA) new cap of 0.8% per day will be introduced from 2nd January. An estimated £250 million will be saved in just one year after the new rules are implemented.

The FCA have said that as many as 7% of current borrowers of payday loans will not be able to take out anymore after the new reform takes effect, which could be up to 70 thousand people.

The loan restrictions will come into place after the Christmas period, which is the busiest time of year for the controversial industry.

For a lot of people, this time of year could see up to 6% of UK consumers take out a payday loan to help pay towards Christmas, according to ComRed research.

The news has been branded as ‘too weak’ by Stella Creasy, MP:

“Today’s news will be welcomed as an early Christmas present for Britain’s legal loan-sharks. This cap is just £1 lower than their current charges in an industry where some firms are making nearly three quarters of a million pounds a week from British customers- such a high cap will do little to tackle these rip off charges.

We’ve warned regulators this cap needs to be much lower to really change the behaviour of these companies, but today’s announcement shows they are still not listening.”

Labour candidate, LizAnne Handibode tweeted:

Screen Shot 2014-11-11 at 12.59.59

Let’s break it down and look how the confirmed changes will work:

  • Initial cap of 0.8% a day in interest charges.  For example, a loan of £100 taken over 30 days, that is paid back on time will come with no more than £24 in interest compared with the £38 that companies charge at the moment.
  • Total cost cap of 100%. If a borrower defaults, the interest on the debt will build up but he or she will never have to pay back more than twice the amount they borrowed.
  • There will be a cap of £15 on the one-off default fee. Borrowers who fail to pay back on time can be charged a maximum of £15, plus a maximum of 0.8% a day in interest and fees. Just now the payment is £20.

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