Payday loans to be subject to interest rate cap

John Fitzsimons
by Lovemoney Staff John Fitzsimons on 28 November 2012  |  Comments 7 comments

An amendment to the Financial Services Bill, allowing the new financial regulator to cap interest rates on payday loans, looks set to be introduced.

Payday loans to be subject to interest rate cap

The Government is set to give its backing to new legislation which will give the Financial Conduct Authority (FCA) the power to cap interest rates on payday loans.

The FCA is set to replace the Financial Services Authority as the chief financial regulator in 2013.

Labour peer Parry Mitchell tabled an amendment to the Financial Services Bill, which is currently going through the reading stage ahead of a vote in the House of Lords, calling for the FCA to be able to step in and cap interest rates “when they are causing consumer detriment”.

The emphasis is on putting the responsibility in the hands of the new regulator.

This amendment now appears to have won the backing of the Government, with Labour Shadow Financial Secretary to the Treasury Chris Leslie saying: “In the face of certain defeat in the Lords, the Treasury have been forced to accept the principle of Labour’s amendment and give the new financial regulator a clear power to protect consumers from extortionate interest rates.

“We now need the new Financial Conduct Authority to act on these new powers and tackle those high-charging payday lenders who are exploiting some of the poorest and most vulnerable in society with exorbitant charges in loan after loan.”

The most high profile payday lender, Wonga, currently has a representative APR of 4,214%.

A step in the right direction

I think this is an important step in the right direction. Much as payday loans leave an unpleasant taste in my mouth, many who have used them are happy with how the loan went, as I highlighted in Payday lenders warned about ‘aggressive’ debt collection tactics. There is clearly a market for short-term loans, so finding a way to prevent them from being quite so punitive is a decent start.

However, what also needs to happen is for the authorities to tackle the way these loans are advertised. A payday loan should be there in the case of an absolute emergency, not to help spend a little extra on Christmas presents, football season tickets or smartphones, yet that is exactly how they are marketed by many payday lenders.

Plus, it's simply too easy to get your hands on a payday loan.

The news of a possible interest rate cap follows the announcement this week that payday lenders had agreed to a new code of practice, designed to give borrowers in difficulty more protection.

The code included the introduction of 30 days breathing space for customers who fall behind on payments in which to get their affairs in order and a cap on the number of times a payday loan can be rolled over.

More on payday loans

Payday lenders warned about ‘aggressive’ debt collection tactics

The dangers of multiple payday loans

How payday loans can scupper your chances of a mortgage

The best alternatives to payday loans

One million Brits use payday loans every month

Cashback websites profiting from payday loans

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Comments (7)

  • DaveB60
    Love rating 7
    DaveB60 said

    It's about time there was a legal limit on interest that can be charged, whoever is lending.

    4,000%+ is not interest, it is usury!

    I suggest a variable maximum, based on the Bank of England Base Rate.

    Something like:-

    Maximum of

    1) Base rate plus 25%


    2) Base rate multiplied by 3

    So at present, with a base rate of 0.5%, maximum interest rate for ANY loan would be 25.5%

    If base rate went up to 15%, maximum interest rate for ANY loan would be 45%.

    The %'s in the above calculations may need to be adjusted, to make the system workable.

    Report on 28 November 2012  |  Love thisLove  0 loves
  • publicspirit
    Love rating 57
    publicspirit said

    Of course the rates of interest for these payday loans should be capped. The current lenders charge rates that make them no better than legalised loan sharks.

    Why has this not been done long ago by any government, Labour, Coalition or Conservative? Government 'by the people for the people,' has become a joke in the UK.

    Report on 28 November 2012  |  Love thisLove  0 loves
  • coloratura
    Love rating 81
    coloratura said

    "Government by the people for the people" will become a bigger joke soon. With the Levinson enquiry all main political parties (notice they are all in it together) will vote to limit what the press can say. Whilst I have no sympathy with phone hacking (and there are already powers in place to arrest people for such actions e.g. members of the Murdock press are on trial at the moment) we do not need laws that will gag the press. Just remember that these laws can be used by Politicians to hide their own misdeed e.g. their Expenses fiddles and a gagged press could lead to even worse corruption that could be hidden. Punishing people who do such revolting things as hacking into the Dowler family home is already a punishable thing. Freedom of the press should be a basic right. When you gag the press then it can only go underground and we start to live in a Communist society. What was it the Politicians said about "Openness" ? Without freedom and openness your bank assets can be frozen in an instance - interest rates won't even matter then - although I do agree that a ceiling needs to be put on usurers as in the comments above.

    Report on 28 November 2012  |  Love thisLove  0 loves
  • This_is_me
    Love rating 21
    This_is_me said

    Another daft idea. More nanny state red tape. If someone is daft enough to take out such loans or spend above their means that is their fault.

    If these companies can't make a profit they will close, meaning no money at all for the desperate fools. They are lucky that anyone will lend to them at any price; I wouldn't lend them anything.

    Report on 28 November 2012  |  Love thisLove  1 love
  • electricblue
    Love rating 769
    electricblue said

    As some commenting are intelligent enough to note (while most aren't, it appears) - Pay Day lenders are usually a last resort of the non-creditworthy and that is why the APR is huge. Putting some ceiling of a few tens of percent APR will just mean no loans to high risk borrowers. I don't really care one way or another, as I would never use one of these awful companies but stop pretending that it will be some massive favour to the mass of borrowers putting these companies out of business

    Report on 28 November 2012  |  Love thisLove  0 loves
  • nosbort
    Love rating 160
    nosbort said

    @DaveBB60. I hope that I am never desparate enough to use one of these lenders but here's a question. If you were desperate to get something sorted out and had no other source, would you pay someone £50 to get hold of £100 for a couple of weeks? If the answer is yes (and if most people think hard enough the situation could occur) then work out the APR and see why it is a meaningless way to measure the cost of these loans. I have no connection with any payday lender and as I said hope NEVER to need them but who knows what the future holds and if the alternatives are payday loans or 'Big Paul' who enforces payment with a baseball bat I know which way I would go.

    Report on 29 November 2012  |  Love thisLove  0 loves
  • yocoxy
    Love rating 152
    yocoxy said

    DaveB60, would you lend someone who is not creditworthy, has a record of non payment, maybe a couple of CCJ's, £100 for a month and think that a return of £102 is a reasonable profit for the risk?

    Of course the APR's look high. That's because they're not intended to be 12 month loans and the risk of non payment is also high.

    Report on 07 December 2012  |  Love thisLove  0 loves

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