Gillian Guy, Chief Executive of national charity Citizens Advice said: "This cap means payday lenders can no longer force borrowers into an endless spiral of debt. This is a real improvement. People have sought help from Citizens Advice after their payday loan of £300 ballooned to over £2,500 worth of debt. The cap will help to stop these serious cases in which sky high interest and extortionate fees turn a small loan into an unmanageable debt."
"The FCA should monitor the cap, including whether it is set at the right level, to make sure it is working for consumers. They must also keep a close eye on whether lenders are sticking to the rules. Problems with high cost credit go well beyond payday loans. We’re concerned about the serious problems people are reporting with products like logbook and guarantor loans. As the new rules force payday lenders to treat customers more fairly, these other areas must be given more attention."
Every working day Citizens Advice Bureaux help with 100 new problems caused by payday loans. Analysis of 30,000 of the most serious debt cases found that young people were more likely use short term credit than other kinds of borrowing. Sixty two per cent of 17-25 year olds who use high cost credit and have come to Citizens Advice with a debt problem used payday loans.
Between April and August this year, Citizens Advice payday loans tracker found that:
- 19% of people were told how to get free debt advice
- 26% were treated sympathetically by their payday lender if they ran into difficulty
- 22% were made aware of the risks of extending a loan
Commenting Chancellor George Osborne said: "We created a powerful new consumer regulator, the Financial Conduct Authority (FCA), to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans. The FCA has now confirmed the cap on the total cost of payday loans – not just the interest rate, but also the arrangement fees as well as the penalty fees – that will come into force in the New Year. This is all part of our long term economic plan to have a banking system that works for hardworking people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with."