Charges Cap Announced on Payday Loans for UK Individuals

November 12, 2014

A cap on how much interest payday loan companies can charge their customers is to be introduced in the UK, the Financial Conduct Authority (FCA) has announced.

The cap will mean that debtors will soon be obliged to pay no more than 0.8 per cent per day in interest on their loans and no one will have to pay back more than double what they originally borrowed.

Default charges on payday loans are also being capped at £15, with the restrictions set to come into effect from January of next year. The FCA has said it hopes the new rules on payday lending will provide considerable relief for borrowers throughout the UK.

“For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts,” said the FCA’s chief executive Martin Wheatley in a statement.

“For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections,” he said.

Wheatley also aimed to make clear that the FCA, as the UK’s financial services regulator, is looking to ensure that the payday loan market can remain viable but that it does not do so at the expense of seriously indebted consumers around the country.

“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,” he said.

Below are further details outlining the FCA’s plans, which were first proposed and consulted on in July but which are set to be implemented unchanged:

1 – Initial cost cap of 0.8% per day – Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
2 – Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
3 – Total cost cap of 100% – Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.

Payday loans have emerged as a major cause of financial distress and serious debt problems for borrowers in Scotland in recent years. The issue has risen up the agenda for regulators as payday loans began to cause more and more problems for borrowers and very high interest charges were being routinely charged even on relatively small loans.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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