More than a million people will see the cost of borrowing lower now that new price caps on payday loans have come into effect.
However, early indications are that many of the biggest players in the industry will charge the maximum amount allowed by the new regime, instead taking the opportunity to set their fees below the cap.
Interest and fees on all high-cost short-term loans are now capped at 0.8% per day of the amount borrowed. If borrowers fail to repay their loans on time, default charges should not exceed £15.
Additionally, the total cost (fees, interest, etc.) is capped at 100% of the original sum, meaning no borrower will ever repay more than double what they borrowed, Financial Conduct said. Authority (FCA). who introduced the new rules.
Someone who takes out a £100 loan for 30 days and pays it back on time will pay no more than £24 in fees and charges.
Payday lending is a multi-billion pound industry: the Competition and Markets Authority said there were 1.8 million payday loan customers in 2012-13, while the FCA estimates that in 2013, 1.6 million customers took out about 10 million loans. However, some lenders exited the market before the changes took place. These include Minicredit, which ceased lending on December 10.
consumer organization Which? said the new regime “is not coming too soon”. Richard Lloyd, which one? chief executive, said: “The regulator has clearly shown that it is prepared to take strong action to stamp out unscrupulous practices, and it must monitor the new price cap closely.”
Which? researched the amounts charged by payday lenders just before Christmas, to see if they had reduced the cost of borrowing before the price cap came into effect. He found that some of the biggest payday lenders had already aligned their fees with the price caps. Wonga, QuickQuid, PaydayUK and MyJar charged a maximum of £24 to borrow £100 for 30 days, with a default fee charged at £15.
When the Guardian checked some of the lenders’ websites on December 31, it found that some had not yet updated their rates. The Peachy.co.uk website listed a cost of £135 for a £100 30-day loan, while Quid24.com listed a cost of £134.70 and Safeloans listed £130.
Which? said the London Mutual Credit Union was the only payday loan provider it looked at that charged less than the maximum allowed under the cap, with borrowers having to pay just £3 in interest on a £100 loan on one month, no default charges.
Martin Wheatley, chief executive of the FCA, said the new caps would make the cost of a loan cheaper for most consumers. “Anyone who is struggling and unable to repay on time will not see the interest and charges on their loan spiral out of control – no consumer will ever owe more than double the original loan amount,” he added.
However, it looks like the new regime won’t mean the end of the huge annualized interest rates quoted on payday loan websites. Despite the changes, Wonga is still able to charge a representative APR of 1,509%, while QuickQuid’s site was promoting an APR of 1,212%.
New rules for payday loan brokers also came into effect after the regulator was inundated with complaints about practices such as charging fees that consumers often didn’t know until they checked their Bank account.
These companies can now not ask for an individual’s bank details or take payment from their account without their prior explicit consent. Payday loan brokers will also be required to include their legal name, not just their business name, in all advertising and other customer communications, and prominently state in their advertisements that they are a broker and not a lender.