People who use payday lenders are set to see the cost of borrowing fall thanks to new rules outlined by the regulator.
Customers will also never have to pay back more than double the amount of the original loan, the Financial Conduct Authority (FCA) has said.
As the name suggests, a payday loan is designed to be a short-term advance (until “payday”). But borrowers often find they can’t pay off the loan at the end of the relevant period, and they can find themselves taking out further high-interest loans to clear their existing ones.
These high-cost loans have been in the headlines for some time, with consumer experts warning that they often quickly lead to a spiral of debt.
Under the FCA’s new rules, payday loans must not charge interest or fees higher than 0.8% a day of the amount borrowed, and default fees must not be more than £15.
“I am confident that the new rules strike the right balance for firms and consumers,” said FCA chief executive Martin Wheatley.
“If the price cap was any lower, we risk not having a viable market; any higher and there would not be adequate protection for borrowers.
“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.”
Citizens Advice welcomed the news as “an important step towards protecting consumers from the debt trap of excessive interest rates and charges”.
Gillian Guy, the charity’s chief executive, said: “This cap means payday lenders can no longer force borrowers into an endless spiral of debt. This is a real improvement.
“People have sought help from Citizens Advice after their payday loans of £300 ballooned to over £2,500-worth of debt. The cap will help to stop these serious cases in which sky-high interest and extortionate fees turn a small loan into an unmanageable debt.”
Citizens Advice said it took on 100 new payday-loan problems a day.
Consumer group Which? also welcomed the development, although it pressed the FCA to keep an eye on the market and take further action if necessary.
“Today the regulator offers hope for millions of borrowers stuck in a cycle of debt, by confirming their plans to rein in the cost of payday loans and crack down on excessive default charges,” said Which? executive director, Richard Lloyd.
“In the meantime, the FCA must keep the cap on the cost under review and tightened up further if it doesn’t work as intended.”