Today the FCA who regulate the payday loans industry, amongst other things, announced its final decision on the cap on interest rates and charges that lenders can make. These new limits will come into effect from January 2015. So, what exactly has the the FCA announced? In effect it confirms what they proposed in July 2014. This includes:
- A maximum interest rate of 0.8% per day
- No more than £15 for a charge if a borrower defaults on their debt
- A person cannot be charged more than double the amount they borrowed
Where does this leave short term borrowers?
Interestingly the 0.8% per day interest rate limit means that if you borrow £100 for 30 days you would not pay more than £24 in interest. A rate of £24 per £100 borrowed is back to the rates charged when payday loans first emerged around 10 years ago. Back then the loans were more likely to be used by credit-worthy employees who genuinely had a short term cash flow problem.
In effect it means that for lenders who choose to remain in the industry they will have to be much more selective about who they can lend to. For borrowers this means that they will have to demonstrate that they can afford to repay the loan on the terms agreed. It is unlikely that a borrower will be able to obtain a payday loan if they cannot show they can afford it, and if they have a history of credit problems. So only the best borrowers will get the best payday loans.
Borrowers who will no longer be able to obtain a payday loan could consider other options.
Where does this leave payday lenders?
The limits imposed by the FCA will radically overhaul the industry. The new rules change the economics for lenders who will now have to strive to make their businesses profitable from potentially just a short term relationship with a borrower. They cannot rollover loans and under no circumstances can they charge more than double the amount borrowed. So they will have to ensure that borrowers repay their loans on time and that means only working with borrowers who have a good credit history and who can show they can afford to repay the loan.
As Mr Hamblin-Boone, the Chief Executive of the Consumer Finance Association, says “We’ll inevitably see fewer people getting fewer loans from fewer lenders”.
The number of lenders in the short term credit industry will decline, but at the same time it is likely that lenders will innovate to find ways of dealing profitably with a wider pool of borrowers within the FCA’s restrictions.