What will payday lending caps mean for consumers?
Payday loan companies have always been controversial, and Wonga has written off the debts of 330,000 people whose loans would have been rejected under the latest lending guidelines. In a measure to protect borrowers from excessive fees, the FCA has introduced new caps on loans.
Under the new rules, interest and fees cannot be higher than 0.8% per day, compared to between 0.4% and 4% per day currently, and if borrowers default on the loans the charge for that cannot be more than £15. What most people are likely to be pleased about though is that repayment costs will be capped at double the amount borrowed. This has been introduced to prevent the repayment costs spiralling out of control, putting the people most in need of financial aid further into trouble.
This is good news for consumers, but the payday loans industry may not be the same again: the FCA's consultation paper stated that:
"reducing the initial charge element of the cap increases the risk of firm exit, and hence the risk that very few firms remain in the market. The modelling suggests that at 0.8% the three largest online firms will be able to continue to offer high-cost short-term credit, and that it is possible that one high-street firm may be able to operate."
The top three companies, operating under five brand names including Wonga, have 72% of payday lending revenues. It has also been announced that, from next month, payday lenders must apply to be authorised by the FCA, and the FCA "will carefully assess their business models and management structure to ensure they are treating consumers fairly and following the new rules. ... Firms that do not meet the required standard will not be allowed to carry on offering payday loans."
This has all been done to protect the consumers, but there is a risk that the regulations will prevent a large number of people being able to access payday loans at all. It is thought that a consequence of the overall changes will block around 70,000 people, which is 7% of current borrowers.
The issue then is where these people will turn for money. The high charges on payday loans make them very unappealing to people who have other alternatives, so it is typically people in serious need of the money who apply for such a loan. With that option removed, there is a concern that loan sharks will receive the business instead. The FCA found that 3.3% of people who had been marginally accepted for a loan had thought about borrowing from a loan shark, and that number rose to 4.7% of people who had been marginally rejected. It said that its finding suggest not getting a loan "does not increase the risk that consumers actually use illegal money lenders", but if hundreds of payday lenders vanish from the market and securing the loan legally becomes much harder, there's a risk that borrowers in a desperate situation will turn to the illegal lenders.
People who have pensions may decide to try and release some money from it, which could see a number of people being caught by pension liberation scams if they are under the age of 55. Pension release is a legitimate option to the over 55s who want to release up to 25% of their fund tax free, but it may not be appropriate for everyone's circumstances. It's important to remember that a pension is to provide security in retirement, and the tax-free cash can be useful to clear debts or make other provisions that will make retirement easier, but it should not be seen as a quick fix option. The concern, then, is where the 70,000 people will be able to turn for financial aid if they can no longer secure a payday loan.
Do you think the payday caps are a good thing, or will they put the most vulnerable at further risk? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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