People using payday lenders and other providers of high-cost short-term credit can expect a big drop in the cost of borrowing, the Financial Conduct Authority (FCA) said today.
The regulator plans to impose a cap on payday lending so that from January 2015, for new and rolled-over payday loans, interest and fees must not exceed 0.8 per cent per day of the amount borrowed.
Fixed default fees cannot exceed £15 and the overall cost of a payday loan will never exceed 100 per cent of the amount borrowed.
FCA chief executive Martin Wheatley said this was a “giant leap forward” for people who struggled to repay their loans.
“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.”
It also ensured that “someone borrowing £100 will never pay back more than £200 in any circumstance.”
Richard Lloyd, executive director of consumer watchdog Which?, said the caps were good to see as lenders had been “running wild for too long”.
“The FCA must keep them on a tight leash to protect consumers. The cap on the cost of loans should be kept under review and tightened up further if it doesn’t work as intended.”
However, Institute of Economic Affairs director general Mark Littlewood believes caps on payday loans would “freeze out” those who really need them.
“Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. Previously, these people could arrange a short term loan from legitimate businesses.
“As has been the experience in other countries, we can now expect more of them to turn to often vicious loan sharks that operate entirely outside the law.”
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