The Financial Conduct Authority has revealed that the interest rates on payday loans are to be capped to only 0.8% a day on the amount that has been borrowed. As well as further caps to the fees and making it so no one will have to pay back more than twice what they have borrowed. The intention behind this, according to Martin Wheatley -FCA Chief Executive- is ‘to put an end to spiralling payday debts’ that many borrowers are finding themselves in due to the high APR percentages being charged by lenders.
The new measures are set to come into force by 2015 and will undoubtedly see a huge change to the short-term high-cost loan markets, but will this necessarily be the solution to the debt problems that are affecting the UK?
The Wider Issues
Different Money a flexible instalment short term loan provider who already utilise such practises offered their opinions regarding the wider issues surrounding lending in general which are not being addressed by these caps. Managing Director Louise Lynch commented:
‘The impact and benefit of this (the caps) for consumers of payday products is inextricably linked to their existing borrowing behaviour. The notion that a cap on interest and fees will protect borrowers from escalating debts is questionable if multiple and repeat borrowing across a number of short term loans is how expenditure is financed.
The cap introduction is, without question, focussed around ensuring lenders in the high-cost short term lending space are treating customers fairly. However, the cap only fits if the wider issue of promiscuous and repeat borrowing behaviours change.’
Ms Lynch went on to offer her comments on how to eliminate the root causes: ‘The real route to addressing escalating debts for consumers is to stop the cycle of borrowing from multiple lenders each month and manage finance through understanding monthly income and expenditure.
Alongside a rate and fee cap, there needs to be a wider understanding of how much consumers need to borrow and how often they need to borrow, in order to protect consumers from escalating debt.’
A Matter of Time
The fallout of the changes will be determined over time; the immediate belief as suggested by Chief Exec of the Consumer Finance Association Russell Hamblin-Boone is that ‘we’ll inevitably see fewer people getting fewer loans from fewer lenders’ but like Louise Lynch has pointed out, the bigger problems of multiple lending will also need to be addressed, to allow the situation, as a whole, to be resolved.