The Financial Conduct Authority has announced proposals to impose a cap on the charges associated with payday loans. The proposals, which will be subject to a consultation period in the autumn, are set to come into force in January 2015 and will reduce the total cost of a payday loan.
The caps will essentially be threefold. Firstly, there will be a cap on interest and fees of just 0.8 percent per day, even if a loan is rolled over. The second element of the proposal is a limit on the total cost of a loan to ensure the total fees and charges do not exceed the original value of the loan. In practice, this means that an original loan amount of £200 could never cost more than £400 to repay. The final recommendation is to limit the amount a lender can charge if a customer defaults to £15.
Putting the squeeze on the industry
The Financial Conduct Authority (FCA) estimates the new caps will cost the payday loan industry a total of £420 million in lost revenue, forcing many smaller operators out of the industry. However, Wonga, the UK’s largest payday lender, has vowed to continue trading.
The cap is just one of a long line of new restrictions to be imposed on short-term lenders. On July 1,restrictions came into forcewhich banned lenders from rolling over loans more than twice or making more than two attempts to reclaim money from customers using continuous payment authority. Lenders were also told to include ‘risk warnings’ on all television advertisements.
The cumulative effect of these new restrictions along with the latest caps have been tough for many payday lenders to bear, with a number of smaller firms deciding to take their leave from the industry. In fact, since 2012, it is estimated that a third of the UK’s 210 payday have left the industry.
Wonga to stay the distance
Despite tough new restrictions, new Wonga chairman Andy Haste has been quick to affirm his belief that the firm will continue to survive the FCA’s clampdown: “In the near term, profitability will be reduced and we will become a smaller business, although I believe we can come through that.”
However, one element of the company that has not survived is the geriatric puppets that many readers will recognise from Wonga’s television advertising campaigns. Speaking of the pensioners, Haste added that they had been put out to pasture because they might appeal to impressionable youngsters.
The price caps in practice
In the last year alone, 1.6 million individuals have accessed over 10 million loans, worth a total of £2.5bn. Of these borrowers, more than half have at some stage had to pay extra charges after failing to repay their loans within the agreed timescale. While such a situation would have once led to spiralling debts, once these proposals come into force the amount payday lenders can ratchet up their charges will be significantly reduced.
In accordance with the new price caps, if repaid within the agreed 30 day timescale, a loan amount of £100 would attract a maximum charge of £24. If the borrower failed to fully repay the loan in this time, they would incur an additional late payment charge of no more than £15. No matter how many times the loan was rolled over, it would never cost more than £200 to repay.
Financial Conduct Authority chief executive Martin Wheatley, said: “There have been many strong and competing views to take into account, but I am confident we have the found the right balance.
“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 the sector and improve the way customers are treated.”
Have you ever had a bad experience with a payday loan? Might this price cap make you more likely to access a payday loan? We’d love to hear your thoughts on this issue, so please leave your comments below.
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