PayDay Loan Rate Cap Still Means Double Debt in 125 Days

PayDay Loan Rate Cap Still Means Double Debt in 125 Days.

Finally, after suggesting in July that they would cap payday loan charges, the finance industry regulator, the Financial Conduct Authority (FCA), after feedback on it’s proposals, has confirmed this week that a charges cap is to be placed on ‘payday’ loan companies with effect from 2nd January 2015.

New Daily Interest Rate Cap

The maximum that payday loan firms will now be able to charge is 0.8% per day.  Previously, when you looked at the small print of payday loans, you saw annualised interest rates, sometimes in the thousands of percent APR.  Whilst now there is some control, the new cap is still high and the FCA suggest that this is striking a balance between protecting consumers as well as trying to be fair to payday loan firms to ensure that access to short term loans can continue without discouraging firms from leaving the payday loan market and thus cutting off a source of finance.

The capped fees are as follows:

1. Initial cost cap of 0.8% per day - Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the original amount borrowed.
2. Fixed default fees capped at £15 - Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate. 
3. 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.
4. The price cap will be reviewed in 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.”

Comment

At 0.8% per day, this would have represented an incredible 1,832% for a year on a cumulative daily interest basis.  It is no wonder, the FCA has issued an overall price cap!

With a total cost cap of 100%, in plain English, this means that the maximum you can be charged overall is double what you have borrowed.

Working back the days, we suggest therefore, at 0.8% per day of the original amount borrowed, if you did not meet payments and had your payday loan debt for more than 125 days, you will have doubled your debt (and that is excluding any late payments), so it could be an even shorter period.

Our guidance is to be very careful if you need a payday loan.  Even at 125 days, to double your debt in around 4 months is still quite frightening.