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Payday loans to be capped at 0.8% to cut cost of borrowing

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The Financial Conduct Authority (FCA) has proposed plans to cap charges payday loan companies implement on debt – with moves that could cost the industry £420 million.

The FCA has proposed a cap of 0.8%, which would mean nobody would have to pay back more than twice what they borrowed – even if they default.

The move by the regulator aims to prevent ongoing abuses in the quick-credit market, and will be implemented from January next year.

Fix default fees will also be capped at £15, with interest on fees not exceeding the overall 0.8% cap.

Martin Wheatley, FCA chief executive, said, “For the many people that struggle to repay their payday loans every year, this is a giant leap forward.”

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The financial loans industry body, the Consumer Finance Association, has replied with discontent at the news as they believe many of their firms will be forced to close – prompting customers to use illegal loan sharks, instead.

Taking to Sky News, Wheatley said, “From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20. That’s a significant saving.”

He added, “Alongside our other new rules for payday firms – affordability tests and limits on rollovers and continuous payment authorities – the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.”

Critics of the industry will welcome the news, with consumer complaints doubling since 2012.

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Industry giant Wonga have also recently been fined for impersonating law firms in order to bully customers into paying debts.

Photo source: sarflondondunc via Flickr 

Further Reading:

Payday loan complaints double in two years

Wonga faces charges of £2.6m for impersonating law firms

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Financial regulator to investigate payday loan debt collection

Lack of competition in payday loan market costing customers

Miliband pledges to force payday lenders to ‘pay back to communities’

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