The financial watchdog the
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,
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
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
Does it go far enough?
Not according to the shadow consumer minister,
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.
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