The cost of payday loans will be limited by new legislation, the Government has announced.
Chancellor George Osborne said a law to cap the cost of payday loans would need to cover the overall cost – including arrangement fees and charges – rather than just the interest rate.
It will be added to the Banking Reform Bill, which is already set to go through Parliament.
Payday lenders have come under fire for interest rates approaching 6,000% APR, as well as past allegations of inadequate credit checks and intimidating behaviour.
Lenders have argued that these sky-high rates do not accurately represent the charges for short-term lending.
But the practice of ‘rolling-over’ loans, which is also standard in the industry, allows these charges to escalate.
The new law will require the City regulator, the Financial Conduct Authority, to make decisions regarding price controls for the payday lending market.
It will decide the level of the new cap when it assumes control of the industry in April 2014.
The announcement follows a Parliamentary consultation earlier this month, where members of the Business Select Committee spoke to trade bodies, consumer groups and regulators about the nature of the controversial industry.
Lenders' representatives claimed that only a small percentage of loans were provided to people who encountered financial difficulties, and that the current setup provided flexibility for customers.
But consumer groups and regulators both expressed concerns that lenders' ethics only extended to what worked for the industry (read more).
James Booker
Which4U
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