Payday loans have seen their fair share of bad press over the last few years, so today (11 November) the Financial Conduct Authority (FCA) confirmed its plans for a payday price cap that will come into force in January 2015. This cap is designed to control the market and protect the end consumer, lowering borrowing costs and providing tighter regulation.
The FCA originally published its proposals for the payday loan market in July, after which there was a consultation period with industry and consumer groups, academics and professional bodies. The structure and level of the price cap remain unchanged after this consultation.
The cap is made up of three components, which tackle the size of the fees charged and the amount of interest paid.
The first component is an initial cost cap of 0.8% per day, which means that payday loans and other forms of high-cost, short-term credit must not have interest rates or fees that exceed 0.8% of the amount borrowed per day. This ceiling will help to lower costs for borrowers and ensure that repayments are more manageable.
If the borrower defaults, the second component of the cap comes into play; the fees charged for defaulting on a loan will no longer be allowed to exceed £15 and, while interest can continue to be charged, it must not be at a higher rate. This part of the cap is aimed at those struggling to repay their debts and helps to protect borrowers from mounting costs they cannot afford.
The third component is designed to prevent costs escalating – a common problem in this market. To curtail this, the FCA will implement a total cost cap of 100%, which means that borrowers will never have to pay more back in fees and interest than the amount borrowed.
In real terms, these caps mean that someone borrowing money for 30 days in January 2015 and repaying on time will not have to pay more than £24 in fees and charges per £100 borrowed.
The FCA anticipates that 7% of current borrowers may not be able to take out a high-cost, short-term loan from January as a direct result of these new rules – some 70,000 people. This group are likely to end up in a worse situation if they take out a payday loan, which means that the barring effects of the price cap will protect them from further financial difficulty.
"I am confident that the new rules strike the right balance for firms and consumers," commented Martin Wheatley, chief executive officer of the FCA. "If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.
"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 protection."
The new rules should protect more people from unmanageable debt, but payday loans are still an expensive way to borrow. If you're looking for a loan for a period of one to seven years, an unsecured loan may be better suited to you and they don't come with such excessive costs. You can compare different unsecured loans using our handy comparison tool.
Compare unsecured personal loans with our comparison tool
Read our guide on payday loans
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