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FCA facing calls for stricter payday loans cap

The FCA is under pressure to go further in its proposed clampdown on the payday loans sector after the number of people with short-term debt surged 42 per cent during the first six months of 2014.

New figures released by debt charity StepChange reveal the number of people with payday loan debts rose from 30,762 in the first half of 2013 to 43,716 in the same period this year.

Furthermore, the total payday loan debt handled by the charity increased from £51m to £72m year-on-year.

In a bid to curtail the payday loans sector, the FCA has proposed capping the amount lenders can charge at 100 per cent of the value of the loan. The new rules are due to come into force in January 2015.

In its response to the FCA consultation, published alongside today’s findings, StepChange urges the regulator to consider implementing a stricter cap.

It says: “There is a case for a tougher total cost cap than 100 per cent of the value of the loan, especially in relation to higher value loans.

“The Competition and Markets Authority found that the average initial payday loan taken out is £260, while the average StepChange Debt Charity client with payday loan debt has an income (net) of £1,305.

“This means that someone with just one payday loan debt which reaches the 100 per cent cap would end up owing a substantial part of their income and could easily lead to further borrowing and deeper financial difficulty.”

StepChange chief executive Mike O’Connor says: “High-cost short-term credit is rarely the answer to financial difficulties. While, the FCA’s proposed price cap is a crucial step forward, there is still much work to be done to ensure that payday loans can no longer plunge people into a cycle of unsustainable borrowing and entrenched financial hardship.

“Consumers will continue to need access to short-term credit and FCA action should also stimulate the reform of this market. This needs to include problems in the adjacent markets including overdrafts, logbook loans and home credit where consumers also suffer detriment.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. A fixed arrangement fee of, say, £25, with interest capped at 1% per day sounds reasonable. Thoughts anyone?

  2. When advising one debt counsellor I was surprised and horrified to see evidence of debts on short term loans that exceeded monthly income net of tax and PAYE. This should not be allowed to happen. I was also alarmed at evidence of large advances by mainstream lenders – advances that seemed too high for the borrower to service.

    Julian Stevens’ suggestion is a good one, but a further suggestion is that primary legislation should be enacted to make recovery of loans that exceeded defined limits (which might be higher for long term loans for cars, boilers etc.) through the courts impossible. Lenders would then be more careful about over lending.

    At the same time, Parliament could declare that loans at above a certain rate of interest could not be enforced.

  3. Julian: If you think you can sustain a short-term lending business at those rates, why don’t you? You’d undercut the rest of the market and people would be queuing round the block.

  4. Yes Joseph, your suggestions would mean that lenders would be more careful about lending, but how does that help the people who take out the loans? Those people still need money, and if you make it more onerous or costly for companies to give it to them, then they’ll just stop and those people will have to go without or, worse, go to local Freddy the loan shark, who charges even higher interest and takes away your knee caps if you miss repayments.

    The vast majority of payday loan customers pay back on time and are very satisfied with their service. Wonga and co. make it extremely easy for you to work it out “you want £100 for 15 days? sure, that will cost you £30”. While I agree that payday loan companies can do more to make information clear on what happens if you miss payments, individuals have to take more responsibility to by understanding what they’re getting into. We need to stop treating people like children and assuming they can’t make grown up decisions for themselves.

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