Government to cap APR on payday loans

Following on from recent criticism of the rates payday lenders are able to charge, it seems there are steps being taken to control the expansion of loans that punish borrowers in the long-term.

The Annual Percentage Rate (APR) is a term often used to describe the interest rate on a loan for a full year. The average APR on payday loans comes to a staggering 2,353 per cent per year. This has led to an average of 8,308 new debt matters being dealt with by the Citizen Advice Bureaux (CAB) every working day. Such figures have led to thousands of people being pushed further into debt problems despite the short-term relief these loans offer. Payday lenders have been criticised for charging huge interest rates and fees and as a result the Government has proposed new plans to cap these interest rates.  

These proposals come in the form of a Banking Reform Bill, which is currently going through Parliament. Its aim is to impose a legal duty on the Financial Conduct Authority (FCA) to cap interest rates and fees. The level of the cap, which has not yet been announced, will be decided by the FCA itself.

The Chancellor, George Osborne, presented the move as a "logical next step" to regulate a market left unregulated. He added that evidence in Australia showed caps on the overall cost of loans could be effective. Australia has a monthly interest rate limit of 4 per cent on payday lenders and a maximum upfront charge of 20 per cent.

The plans suggest that there will not only be a change on interest rates but there will also be controls on charges, including arrangements and penalty fees. It is hoped this will fulfil the aim of capping the overall cost of credit, which would ensure that hardworking people get a fair deal from the financial system.

The FCA has also proposed a series of measures to clamp down on the industry, including limiting loan roll-overs to just two, and restricting the use of continuous payment authorities.

But the Consumer Finance Association (CFA), which represents some of the payday-lending firms, was sceptical about whether price controls would benefit consumers. Their concern was that changes to the law could encourage more illegal lending due to the reduction in access to credit.

To ensure that there is an evidence-based approach to designing the cap, the FCA is being asked to use its existing research to report on its proposed approach. The FCA is therefore liaising with the CAB in order to further investigate payday lending to clients that have been affected by their high interest rates.

The CAB said banks were also to blame by “shunning their responsibilities to offer their customers alternatives to payday loans. The government needs to put pressure on traditional lenders to introduce responsible short-term microloans.”

The FCA takes over as the industry regulator in April 2014, so no changes are expected before 2015.

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