Payday lenders will no longer be able to roll over loans more than twice or make continued raids on borrowers' bank accounts to recover their cash following the introduction of new rules by the financial regulator.
The rules, which come into force on Tuesday 1 July, are designed to deter lenders from offering loans to borrowers who cannot afford to repay them over the original term, and to protect those who struggle with repayments from incurring spiralling costs.
Payday lenders, such as Wonga and the Money Shop, offer short-term loans arranged over days or weeks. They argue that annual interest rates in excess of 5,000% are misleading because debts are paid back before that much interest accrues, but charges can quickly add up if debts are rolled over or repayments are missed.
Collection of loans through a continuous payment authority (CPA) on a borrower's bank account has been controversial, with some consumers being left with no money to spend on essential items.
Some lenders have made repeated use of CPAs to try and claw back their cash, making attempts for a partial payment if their request for a full repayment was refused. From Tuesday, lenders will only be able to make two unsuccessful attempts to collect money through a CPA and both must be for the full repayment; after that, they must contact the borrower to discuss their account.
The debt advice charity StepChange said the new rules represented an important step in addressing some of the sector's failings, but added that the FCA should go further by limiting rollovers to a maximum of one rather than two. It also said that if lenders failed to recover funds through the first attempt, this should be viewed as clear evidence that a borrower was in difficulty, and a second attempt should only be made once it has been established that it posed no further risk to the customer.
The charity also wants more to be done to tackle the issue of multiple payday loan borrowing after encountering 13,800 people who had five or more payday loans last year.
"The industry has already changed significantly for the better, and short-term lenders are now leading the way through initiatives such as real-time credit checks.
"However, over-regulation is a real risk, as it will reduce choice for consumers and leave them vulnerable to illegal lenders. With tighter affordability checks in place, 50% less loans are being granted than a year ago, and we are already seeing major lenders leave the market.
"Those that remain are facing the prospect of a government price control. So despite the fact that borrowers consistently tell us how much they like and value short-term credit, if the regulator turns the screw too far and drives reputable lenders out of the market, these borrowers will be forced to look for credit elsewhere and this creates a perfect market for illegal lenders."
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