News Column

Payday loans cost cap – the key questions answered

July 15, 2014

Hilary Osborne, theguardian.com



The financial watchdog the Financial Conduct Authority (FCA) has unveiled proposals for a cost cap on payday lenders short-term loan companies such as Wonga and The Money Shop that typically offer borrowing of 100 to 1,000 arranged over days or weeks.

Why is the cost being capped?

The payday loans business has been booming since the financial downturn and debt advice groups have reported increasing numbers of people seeking help with problem borrowing. One issue has been the way that costs mount up if repayments are missed or delayed high interest rates and default charges of 40 in some cases mean small loans can quickly spiral. After lobbying from charities, consumer groups and Labour MPs the chancellor, George Osborne, asked the FCA to work on plans for a cap.

How will the cap work?

The amount that lenders can charge will be limited. Someone taking out a typical loan over 30 days and repaying on time will not pay more than 24 for each 100 they borrow the figure includes interest and all other charges for taking out the loan and extending its term.

There will be a separate cap on default charges, and borrowers who miss a repayment or make it late can only be charged 15. Interest can still be applied after the missed payment date, but the FCA has also proposed an overall cap on costs which will prevent anyone having to repay more than double the amount they borrowed.

With the cap in place, the APR is 1,270% for a 30-day 100 loan.

How much are people paying now?

The regulator says that lenders are currently making between 0.4% to more than 4% a day from borrowers, while its cost cap will equate to 0.8%, so people are generally paying more now. Wonga, the UK's largest payday lender, charges interest at 1% a day plus a 5.50 "transmission fee" borrowing 100 for 30 days will cost 37.15. Its default fee is 20 and it charges 10 if you wish to extend the loan.

The Money Shop charges 29.99 on 100 and applies a default fee of 29 plus default interest of at least 1% a day. And it warns customers: "You must pay us any reasonable expenses and costs that we may incur in taking steps to enforce rights against you under the loan agreement."

Will lenders be able to pass on charges for debt collection?

Yes, but these will be included in the cap, so the repayments will still not be able to go over 100% of the original loan. All costs including things such as insurance will also be included. The FCA says: "This is necessary in order to avoid the risk of gaming the cap through ancillary service."

When will the cap apply?

The cap comes into force on 2 January 2015 and applies to all loans arranged after that date and any that are rolled over.

Does it go far enough?

Not according to the shadow consumer minister, Stella Creasy, who has been a long-time campaigner against the industry. "Anyone who thinks this is the end of legal loan sharking in Britain is in for a nasty shock," she said. "Without further revision, this total cost cap of 100% of the borrowed amount will leave British consumers less well protected than their counterparts in Japan and most of Canada and the United States. The Financial Conduct Authority must commit to continually reviewing and reducing this cap and as well as ensuring it covers the whole of the industry to make sure none of these legal loan sharks slip through their net."

Citizens Advice said the cap would help limit the scale of debts but its success would depend on enforcement. It said consumers also needed more choice so they did not need to use payday loans.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Guardian Web


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters