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Payday lenders to have charges capped


Payday lenders are likely to see the amount they can charge their customers capped from January 2015, after the Financial Conduct Authority (FCA) announced tougher plans to regulate the industry.

The plans will mean that interest rates on payday loans will be capped at 0.8% a day of the original amount borrowed, whilst no person will be obligated to pay back more than twice the value of their loan.

Additionally, payday lenders will only be able to charge a maximum of £15 in default charges for late payments.

The FCA said the average customer can expect to save £193 a year under the new regulations, whilst it is expected cost the industry £420m a year, which is about 42% of their total revenue.

Speaking about the planned changes, Martin Wheatley, chief executive of the FCA said: “For the many people that struggle to repay their payday loans every year, this is a giant leap forward”.

Illegal lenders

However, industry leaders have criticised the new regulations, stating their belief that they could lead to vulnerable people turning to loan sharks.
These claims were based on what has happened in Australia since they brought in similar regulations to the payday industry.

Russell Hamblin-Boone of the Consumer Finance Association (CFA) said: “The evidence from other countries is that people either turn to illegal lenders - the back-street loan sharks - or more likely, they'll go to online lenders who are operating outside of the UK."

The FCA has admitted it could be the case that some people will no longer be able to turn to payday loan companies, but claimed that in the long-term, these customers would be better off without the loan, due to the previously “excessive” charges.

There has already been a reduction in the number of payday loans since July the 1st when the FCA introduced regulations such as affordability checks and controls on lenders ability to take money from customer’s bank accounts.

A summary of the changes:

1. There will be an initial cap of 0.8% a day in interest charges. So for example, if somebody loans £250 for 14 days, they will pay no more than £28 in interest.
2. Companies will be unable to charge more than £15 in default fees if a customer defaults on their loan payments.
3. The total cost of the loan will be set at 100%, even if the customer defaults on their payments. So for example, a person who lends £250 will pay back no more than £500.<.p>

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