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:
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.
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