Watchdog announces cap on payday loan charges
The Financial Conduct Authority has announced a cap on the amount of money payday lenders like Wonga can charge for a loan. But is this enough to prevent people from spiralling into debt?
The idea is simple. A person borrows a few hundred pounds from a payday loans company to tide them over until they receive their next pay cheque. They then pay back the money they have borrowed, plus the interest, on time. For those with poor credit records unable to borrow more cheaply from banks, the money can help to pay their household bills.
But in recent years, the payday loans industry has been criticised for charging extortionate sums to those unable to pay back loans on time. Interest can rapidly swamp the size of the original loan, leaving borrowers sinking into never-ending debt. In some nightmare cases, borrowers have been chased by bailiffs for thousands of pounds, having borrowed just a few hundred.
One firm, Wonga, has been branded by MPs, campaigners and even the Archbishop of Canterbury as unethical and immoral. Recently it was fined for sending threatening letters, pretending to be from solicitors, to borrowers demanding repayment.
Now, the regulator in charge has stepped in. This week, the Financial Conduct Authority (FCA) announced a cap on the amount payday loans companies can charge customers under rules expected to come into force next January.
The FCA proposes that interest and fees charged by short-term lenders must not exceed 0.8% per day of the amount borrowed. This means that if a person borrows £100 for 30 days and pays the money back on time, they will pay no more than £24 in interest. Currently, Wonga charges £37.15.
There will also be a total cost cap of 100%, so that even if a person fails to repay the money on time, they will never have to pay back more than twice the amount borrowed. Someone struggling to repay a £100 loan, for example, will not have to pay back more than £200.
It appears there is change within the industry too. This week, Wonga’s new chairman vowed to clean up the company’s reputation. One of his first moves has been to ban the pensioner puppets used in its TV adverts, which critics say appeal to children and trivialise debt.
Critics of companies like Wonga accuse them of creating a type of modern slavery and say the cap is a good idea. People who have to borrow money to pay off other loans have their lives owned by companies profiting from their misery. These caps will prevent borrowers from personal and financial ruin.
But others fear the caps will have unintended consequences. People go to Wonga because they can’t get cheaper credit elsewhere. Lenders will increasingly reject those with poor credit records, and making it harder to obtain a loan will mean those desperate for cash will fall prey to illegal loan sharks. And even with the cap, the payday lenders’ costs are still hefty.
- Are the proposed caps a good or a bad idea?
- Is it immoral to lend money for profit?
- In groups, come up with five rules for how to manage your money responsibly.
- If you take out a £840 loan over 30 days at an interest rate of 0.8% per day, how much money will you have to pay back?
Some People Say...
“Lending with interest is not much better than stealing.’Doris Lessing”
What do you think?
Q & A
- Surely the answer is simple – don’t borrow money you can’t afford to pay back.
- It’s not quite that simple. The payday loans industry boomed immediately after the UK economy went into recession in 2009. Rising living costs and cuts to benefits resulted in many people being forced to turn to these companies for cash to make ends meet. While the companies may say that their customers make informed, free decisions to borrow money, campaigners argue that most do not have any other option.
- How many people will be affected by this?
- The FCA estimates that 1.6 million people took out a total of 10 million loans worth £2.5bn last year. More than half of these borrowers had to pay extra charges because they did not repay their loans on time. In contrast, Wonga made £60m last year.
- Archbishop of Canterbury
- The Archbishop of Canterbury, Justin Welby, promised to put the payday lender Wonga ‘out of business’ with Church of England-backed credit unions. Yet he was forced to admit last year that the Church of England had invested in one of Wonga’s main financial backers. This week it was announced that its ties with the company have now been severed.
- Threatening letters
- Between October 2008 and November 2010 Wonga sent letters to customers who were in arrears under the names Chainey D’Amato & Shannon, and Barker & Lowe Legal Recoveries. It is a criminal offence for anyone to call themselves a solicitor or to act as a solicitor if they are not one.
- Loan sharks
- Unlike legal lenders, most loan sharks do not give their clients any paperwork so borrowers never know exactly how much they owe. Loan sharks often use brute force, violence and intimidation to get their money back, having charged eye-watering interest rates.