Payday lenders have been coming under fire from the financial industry almost as long as they've been in business. Sky-high interest rates, unfair lending practices and poor treatment of struggling borrowers means they've been met with strict scrutiny from regulators, and now the Financial Conduct Authority (FCA) has stepped in to apply further pressure.
The FCA has proposed several new measures that will significantly cut the cost of borrowing for those seeking payday loans and other forms of high-cost short-term credit. Under the new rules, fees and interest charges will be capped at a set daily rate while default charges will be a flat fee, and there'll be no chance for borrowing to spiral out of control as the overall cost of a loan will never exceed the amount borrowed.
Specifically, the FCA's key proposals are as follows:
It's estimated that these measures will save customers an average of £193 per year, and will prevent them from getting tied down with more debt.
Martin Wheatley, the FCA's chief executive officer, said:
"For the many people that struggle to repay their payday loans every year, this is a giant leap forward. 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.
"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."
The rules are due to come into force in January 2015, and they can't come soon enough for a lot of consumer groups. Citizens Advice Chief Executive Gillian Guy said: "Up until now, payday lenders have had the green light to send people into a spiral of unmanageable debt.
"High interest rates and excessive charges have made small short-term loans balloon to long-term debts worth thousands. The cap will help limit the scale of debts but [it's] not the final piece of the puzzle; consumers need more choice and access to advice.
"For some people who are already struggling, instead of another loan, access to free, independent and impartial advice would help people get on top of their finances, and it's important lenders are pointing would-be borrowers towards this help."
It's hoped that the proposals will have the desired effect, as well as – ideally – helping improve the service customers receive. The announcement came a day after Dollar, a payday lender trading as The Money Shop, agreed to pay around £700,000 in refunds to customers, and just weeks after Wonga was ordered to pay £2.6m in redress for poor debt collection practices.
These cases, and many more besides, highlight the poor service a lot of customers have had to put up with over the last few years, but hopefully it could soon be a thing of the past.
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