Credit Cards & Loans
FCA to impose price cap on payday lenders
The Financial Conduct Authority (FCA) has proposed restricting the amount borrowers using payday lenders can be charged in interest and fees, in a move which estimates suggest could cost providers £420m in revenues.
Proposals for a cap on payday lending mean that, from January 2015, charges and interest on new loans must not exceed 0.8% per day of the amount borrowed.
Additionally, fixed default fees cannot exceed £15 and the overall cost of a payday loan will never exceed 100% of the amount borrowed. The proposals include when loans are rolled over.
A survey of the existing market conducted by the regulator suggests that firms are currently generating revenues of between 1% and 2% per day from borrowers.
It said it expects a price cap will have “a significant impact for many borrowers on the charges they are incurring” and could see firms lose as much as £420m in revenue per year.
The FCA’s estimates suggest consumers will save, on average, £193 per year, translating into aggregate annual savings of £250m.
FCA chief executive Martin Wheatley said: “For the many people that struggle to repay their payday loans every year this is a giant leap forward.
“There have been many strong and competing views to take into account, but I am confident we have 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 a sector that badly needs to improve how it treats its customers.”
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, Wheatley said. Someone taking the same loan for 14 days will pay no more than £11.20.
Meanwhile, for those who struggle with their repayments, the proposals ensure someone borrowing £100 will never pay back more than £200 in any circumstance.
The FCA’s key proposals:
Initial cost cap of 0.8% per day. For new loans, or loans rolled over, interest and fees must not exceed 0.8% of the amount borrowed. This lowers the costs for those borrowers paying a daily interest rate above the initial cost cap.
Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers cannot repay their loans on time, fees must not exceed £15. Interest on unpaid balances and default fees must not exceed 0.8% per day of the outstanding amount.
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.
