Is This The End for Payday Loans?
A further blow has been dealt to the payday loans industry as regulators the Financial Conduct Authority (FCA) announce strict new limits on the amount lenders can charge their customers.
From 2nd January, the total of interest and fees charged will be limited to 0.8% per day of the loan amount, and the total amount of fees and interest charged will not be allowed to exceed the amount of the original loan. Further, default fees charged for not repaying on time will be capped at £15.
The FCA says these new measures will help stop people getting caught in a spiral of payday debt as default fees and interest mount up for those unable to make repayments.
Smaller Market, Less Lenders
The regulators acknowledge that the new charging caps will make the payday lending business much less profitable, especially with smaller loan amounts, and will have the effect of reducing the market by 7% as lenders turn away would-be borrowers. This comes on the back of an existing 35% drop in loans issued since the FCA took over regulation responsibilities earlier this year and imposed tighter lending criteria including more stringent affordability checks.
While these latest measures have been cautiously welcomed by most debt campaigners, there is no doubt that many lenders will decide to leave the industry altogether, and it's thought that eventually there will only be three online lenders remaining, with one high street chain. Representatives of payday lenders go further, claiming that high street payday lenders, with their higher running costs, could disappear entirely within a year, leaving only a few big names online.
While few will mourn the passing of outrageously high interest rates and the other excesses of the last few years, some worry that the effective removal of easy access to small loans may drive people into using the 'services' of illegal lenders, whether that be loan sharks or overseas outfits operating beyond the control of the regulators. The FCA denies that this is the case, saying that of the 7% who would now be denied a loan, around 70,000 people, only around 2% would take the route of dealing with a loan shark. Whether or not this estimate is realistic remains to be seen.