FCA confirms price cap rules for payday lenders

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FCA confirms price cap rules for payday lenders

The Financial Conduct Authority (FCA) have put into place rules which will ensure that people using payday lenders or provide of high-cost short-term loan will not have to pay back any more than double the amount of the amount which was originally borrowed.

The FCA’s chief executive officer, Martin Wheatley said:

‘I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then 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.’

The proposals for a payday loan price cap were published by the FCA.

The following price structure cap will not be modified, these are:

  1. Total cost cap of 100% – Borrowers can never pay back more in fees and interest than the amount borrowed.
  1. Initial cost cap of 0.8% per day – interest and fees must not exceed 0.8% per day of the amount borrowed on all high-cost short-term credit loans,
  1. Fixed default fees capped at £15 – This means if a borrower cannot repay their loan on time then a charge of no more than £15 can be applied. Interest on unpaid balances and default charges must not exceed the initial rate. 

Today, a borrower will never have to pay back more than double the initial loan amount. As an example, anyone borrowing £100 over 30 days will never have to repay more than £24 in fees and charges for each £100 borrowed.

Price cap consultation, further analysis

Many professional bodies, consumer groups, academics and various stakeholders were consulted by the FCA on the proposed price cap and they estimated that around 10 to 11% of borrowers who had relied on short borrowing would be affected as they would no longer have access to credit of this type.

FCA actions resulted in a significant drop within the initial 5 months of the consumer credit regulation and the number of short term loans fell by almost 35%. Since then the FCA have conducted further studies after having access to more data they determined that 7% of current borrowers would be affected due to payday loan business exiting the marker.

The 7% equates to around 70,000 people. These people would have been the ones worse affected had they been granted a loan in the first instance under the old system, this is one example where the price cap will protect the most vulnerable in our society.

Initial cost cap

  • The initial cost cap is set to 0.8% of the outstanding principal for each day, and on all interest plus fees that are charged for the life of the loan and when refinancing. 
  • Lenders are able to structure their charges under this cap however they please, they could charge for example some of the fees upfront and the remaining as roll over fees.

Default cap

  • The default cap charges will be set to no more than £15. 
  • Interest can continue to be charged but at no higher rate than the initial cost cap (calculated per day on the outstanding principal and fixed default charges).

Total cost cap

  • A borrower will never pay back more than double of the initial borrowed amount, this includes all fees, charges and interest.

Repeat borrowing

  • When the borrower takes out an additional loan the price cap will apply to the new loan as a separate agreement, and so to repeat borrowing in the same way as for a first loan.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk