The new payday loan rules: what are they?

posted by in Debt, Payday Loans

Payday loans neon sign

Payday loans are still very expensive

Today the new payday loan rules, introduced by the Financial Conduct Association (FCA), come into place. While it may seem like an odd thing to celebrate, we’re rather happy about it as finally we can say good riddance to bad practice.

The past few years have seen loan shops popping up on the high street and some lenders using adverts with friendly characters and catchy jingles to encourage people into taking them out. Payday loans quickly became the ‘norm’ and many used them to get a quick fix of cash. Unfortunately, things could spiral out of control pretty quickly if you were late on repayments, with interest and late fees adding up, sometimes leaving you in a worse situation than when you started.

Recognising cases of irresponsible lending and debt inflation in the market, the FCA has introduced new rules to come into place from today. Hopefully these will help to keep the payday loan industry under control and clamp down on unfair lending.

 So what are the new rules and how do they affect you?

The new rules apply to high cost, short-term credit loans and apply to each loan agreement:

1. An initial interest cap of 0.8% per day

This applies to the interest of the loan itself and any extra fees (for late payments). So if you take out a loan for £100, the daily interest rate will be 80p per day. If you then have a late fee on top of your loan repayment, the interest on the fee will be capped at 0.8% a day too.

So, if you took out a loan of £100 for 30 days and paid it back on time, you’d pay £124.

Why is this better than before? It lowers the cost of the loan for most borrowers.

2. Fixed default fees capped at £15

If you take out a loan and can’t pay it back on time, default charges from the lender must not exceed £15. A daily interest rate can then be added to this fee but as mentioned before, this is capped at 0.8% per day.

So, if you’re late paying back a payday loan you will receive a one-off charge of up to £15 plus 0.8% interest for each additional late day.

Why is this better than before? This is a fairer estimate of the costs of extra letters or phone calls the lender needs to make if you default. Previously we’d seen payday loan companies add default fees which were far higher than their actual costs – up to £350 in some cases.

3. Total cost cap of 100%

From today onwards borrowers will never have to pay back more than twice the amount they’ve borrowed. So if you take out a loan of £100, you cannot pay back more than £200, including any late payment fees.

This means as soon as the loan, interest, and default fees add up to double your original loan amount, nothing more can be added to the debt.

Why is this better than before?. This gives borrowers peace of mind that the debt won’t keep spiralling upwards. We’ve seen lots of cases of small payday loan debts increasing by 5 or 10 times – sometimes even more – with charges and interest added.

You can see the new rules in this infographic, featured on the FCA website:

FCA new payday loan rules graphic

Payday loans are still very expensive

If you’re considering a payday loan, you might find our payday loan calculator useful, to see how much you’d have to pay back if you were to take one out. Although the new rules from the FCA will help reduce the possibility of spiralling debts, payday loans are still a very expensive way to borrow money. Despite the cap on costs, you could still be paying back very high amounts and if you’re already struggling to make ends meet, this could make the situation even worse.

If you have emergency expenses, there are alternatives to payday loans or, if you do feel like you are struggling financially, you can contact us for free, impartial debt advice.

Want to keep up-to-date on the latest payday loan news and receive money-saving tips straight to your inbox? Sign up to our newsletter!

At StepChange Debt Charity we want you to be free of debt and save money.

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Tags Debt Payday Loans
  • Aaron Gorton

    Does the cap include rollover agreements? For instance, the majority of payday loan firms allow you to ‘rollover’ your loan for another 30 days by paying the interest. In some cases it has been seen to become easier to simply pay the interest and continually roll the loan over rather than parting with the larger rate.

    Also – are these new laws retroactive? It would be helpful for existing customers to understand how the cap may effect them.

    • moneyaware

      Hi Aaron,

      Thanks for getting in touch.

      The new cap on payday loans applies to loans taken out from the 2nd January 2015.

      So these new rules start from the 2nd January and aren’t retroactive unless the loan is refinanced on or after this date.

      Anyone who has payday loans and is struggling to pay them back we’d recommend they contact us for advice.

      http://www.stepchange.org/Contactus.aspx

      I hope this helps,

      Jen

  • moneyaware

    Hi there,

    Thanks for your message. These new rules apply to loans taken out from 2nd January 2015 and aren’t backdated unless the loan has been refinanced after this date.

    I hope this answers your question.

    Kind regards,

    Laura

  • Stephanie Trotter

    Do these caps only apply to payday loans? What about credit cards? Are there any caps on the percentage of interest on them?

    • moneyaware

      Hi Stephanie,

      Thanks for posting.

      These caps currently apply to payday loans.

      There currently aren’t caps on the amount of interest that can be charged on credit cards. Although the amount charged
      should be included in the terms and conditions of the agreement that’s taken out with the lender.

      If you have any more questions please let us know.

      Kind regards,

      Jen