Payday loan charges cap takes effect

Payday lenders have been subject to various new regulations

A cap on the cost of payday loans enforced by the City regulator has now come into effect.

Payday loan rates will be capped at 0.8% per day of the amount borrowed, and no-one will have to pay back more than twice the amount they borrowed.

The Financial Conduct Authority (FCA) said those unable to repay should be prevented from taking out such loans.

Many payday lenders have already closed down, in anticipation of the new rules, a trade body has said.

And the amount of money being lent by the industry has halved in the past year.

Christopher Woolard, of the FCA, said the regulator had taken action because it was clear that payday loans had been pushing some people into unmanageable debt.

"For those people taking out payday loans, they should be able to borrow more cheaply from today, but also we make sure that people who should not be taking out those loans don't actually get them," he said.

Loan sharks

The changes mean that if a borrower defaults, the interest on the debt will still build up, but he or she will never have to pay back interest of more than 100% of the amount borrowed.

There is also a £15 cap on a one-off default fee.

Russell Hamblin-Boone, of the Consumer Finance Association, a trade body for payday lenders, said the landscape of payday lending had changed.

"There will be fewer people getting loans from fewer lenders and the loans they get will no longer be the single payment loans for less than 30 days," he said.

"The loans that are available now will be for three months or more and they will be at slightly higher values as well. Very few loans will be rolled over."

'Unscrupulous practices'

The FCA's research suggests that 70,000 people who were able to secure a payday loan under the previous regulations would be unable to do so under the new, stricter rules.

They represent about 7% of current borrowers.

Mr Woolard argued that only a very small number would seek credit from unregulated loan sharks instead.

He added that the regulator would be monitoring the situation carefully.

He also said that the reforms needed time to bed down before their effect was assessed. There has been some criticism that the initial review is scheduled in two years.

Richard Lloyd, executive director of Which?, said that the changes came "not a moment too soon".

"The regulator has clearly shown it's prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review," he said.

"It is now time to turn the spotlight on unfair practices in the wider credit market. We want to see an end to excessive fees that also make it hard to compare different loans, including those charged for unauthorised overdrafts and credit cards."