More than 1m users of short-term loans are expected to see the cost of their borrowing fall as a result of new price caps on payday lenders taking effect on Friday.
However, early indications are that many of the sector’s bigger players will be charging the maximum amount they are allowed under the new regime, rather than setting their fees well below the cap.
Interest and fees on all high-cost short-term credit loans are now capped at a daily rate of 0.8% of the amount borrowed. Meanwhile, if borrowers do not repay their loans on time, default charges must not exceed £15. In addition, the total cost including fees and interest is capped at 100% of the original sum. According to the Financial Conduct Authority, which has introduced the new rules, this means no borrower will ever pay back more than twice what they borrowed.
The price caps mean someone taking out a £100 loan for 30 days and paying it back on time will pay no more than £24 in fees and charges.
Stella Creasy, the Labour MP and prominent campaigner for payday loan reform, warned that the default charges encourage companies to continue pushing households into debt. “Little wonder despite intense scrutiny many of these firms can still make nearly three-quarters of a million pounds a week from British customers,” she said.
Payday lending is a multibillion-pound sector: the Competition and Markets Authority said there were 1.8 million payday loan customers in 2012-13, while the FCA has estimated that in 2013, 1.6 million customers took out around 10m loans. However, some lenders have quit the market ahead of the changes taking place; these include Minicredit, which ceased its lending activities on 10 December.
Consumer organisation Which? said the new regime “comes not a moment too soon”. Richard Lloyd, Which? executive director, said: “The regulator has clearly shown it’s prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review.”
Which? carried out research into the amounts that payday lenders were charging just before Christmas, to see if they had cut the cost of borrowing ahead of the price caps taking effect. It found that some of the bigger payday lenders had already brought their charges in line with the price caps. Wonga, QuickQuid, PaydayUK and MyJar were charging the maximum £24 to borrow £100 for 30 days, with default fees charged at £15.
Which? said 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 loan of £100 over one month, and no default fees.
The payday loan industry trade body, the consumer finance association, warned that fewer people will get short-term loans and the number of lenders will fall. “We expect to see fewer people getting loans from fewer lenders and the loans on offer will evolve but will fully comply with the cap. The commercial reality is that the days of the single-payment loan are largely over – payday loans are being replaced by higher-value loans over extended periods.”
Martin Wheatley, chief executive of the FCA, said the new caps would make the cost of a loan cheaper for most consumers. “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control – no consumer will ever owe more than double the original loan amount,” he added.
However, it appears the new regime will not spell the end of the huge annualised 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 covering payday loan brokers also take effect on Friday after the regulator was deluged with complaints over practices such as imposing charges that consumers often knew nothing about until they checked their bank account.
These firms cannot now request an individual’s bank details or take a payment from their account without their “explicit consent” first. Payday loan brokers will also have to include their legal name, not just their trading name, in all advertising and other communications with customers, and state prominently in their ads that they are a broker, not a lender.