Could Cap on Payday loans in UK benefit Borrowers?

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Could Cap on Payday loans in UK benefit Borrowers?

Payday loan firms in the UK face a cap in lending,

As they do in the US, Australia and much of Europe, but what does it really do and what does it mean for its borrowers?

Before continuing, let’s define payday loans. Payday loans is a short-term loan which can be acquired and arranged over a matter of weeks or even days. These loans are usually up to £1,000 and are offered online by UK lending firms such as Wonga and QuickQuid and on the high street by firms including The Money Shop and Cash Converters.
The interest rates on these loans are high, APRs usually charge more than 1,000% and some of the best known companies charge more than 5,000%.

What does a cap do? A cap would limit how much a lender could charge for a loan,

so for example a borrower was unable to make repayments on time, the amount where they are in debt would stop growing at the cap.

The details of the cap which is included in the banking reform bill are still unclear, but the chancellor, George Osborne, has said it “”will not just be an interest rate cap””, but a cap on the cost of the credit. However, the cities’ financial watchdog, Financial Conduct Authority will still have the last word on what level it will be set at. According to the treasury, the cap will only apply to payday loans, but it also said that FCA can also extend this to other types of lending if necessary. This means the coverage of cap has no power over other forms of unsecured borrowing and unauthorised overdraft charges.

The UK’s cap on payday loans has precedents in other countries

wherein FCA may follow. For example, Payday lenders in Australia are restricted to charging up to 20% upfront and up to 4% a month. On £100 borrowed over 30 days that would limit charges to £24. In the UK, £100 borrowed from Wonga costs £137.15 and interest is added at 1% a day.

Citizens Advice’s chief executive, Gillian Guy, said: “”To truly tackle the cost of payday loans there needs to be more competition in the payday loan industry … The government needs to put pressure on traditional lenders to introduce responsible short-term micro-loans.””

Blomfield said: “”As well as capping the cost of credit,

the government need to address the issues of affordability checks, rollovers, use of continuous payment authorities, support for debt advice and regulation of advertising.

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