FCA confirms payday loan cost cap

New limits on what high-cost short-term credit providers can charge.

The Financial Conduct Authority (FCA) has confirmed a new price cap on what high-cost short-term lenders, such as payday loan firms, can charge.

From 2nd January 2015, interest and fees on these sorts of loans must not exceed 0.8% per day of the amount borrowed.

For a typical loan taken out over 30 days and repaid on time this means a borrower would not pay more than £24 per £100 borrowed.

In addition, default charges, which occur when a borrower fails to pay what they owe on time, will be capped at £15.

And there will be a ‘total cost cap’ of 100%. This means borrowers will never have to pay back more in fees and interest than the amount borrowed.

The FCA says the new rules will see the cost of borrowing through a short-term loan fall and borrowers will never have to pay back more than twice what they originally took out.

These limits were originally proposed back in July and following a consultation have now been confirmed. The FCA said the price cap will be reviewed again in the first half of 2017.

Martin Wheatley, the FCA's Chief Executive Officer, said: "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."

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The potential impact

The FCA has predicted the new rules could cost the payday loan industry £420 million.

The regulator said the impact on profits means many firms might be forced to leave the market.

The FCA also estimates around 70,000 people will no longer be able to access high-cost short-term loans once the new rules come into force.

But the watchdog said these people are likely to have been in a worse situation if they had been granted a loan, so the price cap will protect them.

Those still eligible for loans will benefit from lower costs. The FCA has estimated an average saving of £14 per loan, which adds up to £250 million per year.

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Response to the new caps

Many have welcomed the new price caps from the FCA.

Richard Lloyd from consumer group Which? said: “Today the regulator offers hope for millions of borrowers stuck in a cycle of debt, by confirming their plans to rein in the cost of payday loans and crackdown on excessive default charges. In the meantime the FCA must keep the cap on the cost under review and tightened up further if it doesn’t work as intended.”

While the StepChange Debt Charity said it was “good riddance to bad practice” but more options need to be developed for the financially desperate.

Mike O’Connor, Chief Executive of StepChange, said: “These rules address problems associated with the supply of payday loans, but we also need to address the demand for such harmful financial products. We see every day how payday loans have become the last resort for the financially desperate. Credit is rarely the answer to financial problems. We need better options for those struggling with the burden of debt – this is now the challenge for policy makers, creditors and the voluntary sector.”

But the Consumer Finance Association (CFA), the trade body which represents some of the UK’s biggest short-term lenders, said the rules would force people unable to get a loan to take drastic action.

Russell Hamblin-Boone, Chief Executive of the CFA, said: “With the cap, fewer people will get loans from fewer lenders but the demand for credit will still be there and so there will be no significant impact on debt levels.

“The warning signs are already there. Only a quarter of people turned down for loans under tougher lending criteria said that they were better off not getting the money; the rest incurred charges for missed payments.  The regulator will need to monitor this closely and act to prevent illegal lenders filling the credit gap.”

Read The best alternatives to payday loans for tips on lower-cost alternatives. If you're seriously struggling with debt, read our guide Where to get free debt advice.

Do you think the new limits go far enough? Let us know in the Comment box below.

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