Consumers taking out Payday loans or other high-cost short-term credit will not have to pay back more than double what they originally borrowed
The UK payday loan and high-interest short-term credit industry is reportedly worth £2.8 billion a year. Since the credit crunch the industry has gone from strength to strength but has consistently come under attack for it businesses practices.
Fake legal letters for accounts in arrears. Not checking applicants ability to repay any loan. Rolling over loans month after month, and lets not forget interest rates in the thousands. Payday Wonga recently agreed to write off a staggering 330,000 loans which will cost the company around £220 million.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, told BBC Radio Four’s Today programme: “the payday loans industry had already put in place higher standards of conduct.
“We’ve restricted, for example, extending loans, rolling over loans, [and] we’ve got tighter checks on people before we approve loans. This [cap], if you like, is the cherry on a rather heavily-iced cake” he told BBC Radio Four’s Today programme.
It’s interesting when you read Mr Hamblin-Boone’s statement that he gives you the impression the industry did all the above on their own freewill and did not have to brought kicking and screaming to make changes.
“We’ll inevitably see fewer people getting fewer loans from fewer lenders,” Mr Hamblin-Boone said. “The fact is, the demand is not going to go away. What we need to do is make sure we have an alternative, and that we’re catching people, and that they’re not going to illegal lenders.”
The FCA consulted widely on a proposed price cap with various stakeholders, including industry and consumer groups, professional bodies and academics. In July, the FCA estimated that the effect of the price cap would be that 11% of current borrowers would no longer have access to payday loans after 2 January 2015.
In the first five months of FCA regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35%. To take account of this, FCA has collected additional information from firms and revised its estimates of the impact on market exit and loss of access to credit. We now estimate 7 % of current borrowers may not have access to payday loans – some 70,000 people. These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them.
In the July consultation paper the FCA said it expected to see more than 90% of firms participating in real-time data sharing. Recent progress means that participation in real-time data sharing is in line with our expectations. Therefore the FCA is not proposing to consult on rules about this at this time. The progress made will be kept under review.
The FCA published its proposals for a payday loan price cap in July. The price cap structure and levels remain unchanged following the consultation. These are:
- Initial cost cap of 0.8% per day – Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
- Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
- Total cost cap of 100% – Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.
From 2 January 2015, no borrower will ever pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.
Martin Wheatley, the FCA’s chief executive officer, said: “I am confident that the new rules strike the right balance for firms and consumers. 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 protections.”
With new lending criteria and caps on loans the industry claims it’s inevitable that fewer people will now qualify for loans which will lead to fewer lenders. The Consumer Finance Association opinion is the demand is not going to go away.
The concerns are obvious. Russell Hamblin-Boone concluded: “What we need to do is make sure we have an alternative, and that we’re catching people, and that they’re not going to illegal lenders.”