Websites offering instant cash still operating despite payday loan rates cap
Is this the end of the payday lenders? Probably not or at least not if the Financial Conduct Authority has got its modelling right.
The cap on loan rates is designed to impose discipline on an industry widely seen as crooked without causing it to collapse entirely.
The FCA is trying to strike a balance between the social need for payday loans while trying to protect borrower from overextending themselves.
This is what the FCA boss Martin Wheatley had to say:
In the past payday lenders not only lent to people they knew were highly likely to get into trouble, their business models depended on it.
Wonga recently admitted it lent unscrupulously and on an industrial scale.
The FCA's cap works in three ways:
A cap on the interest charged of 0.8% a day (80p per £100 borrowed). Hitherto, some daily interest charges had been as high as 4.3% (£4.30 for every £100 borrowed).
A cap on default fees of £15. Previously they were as high as £45 and could be repeatedly applied to a single loan albeit with some restrictions.
A total cost cap of 100%. Borrow £100, you will never have to repay more than £200. Until now there has been no upper limit
The FCA says there were 400 payday lenders of one shape or form when they took over regulation of the industry back in April, it knows this because they signed up for authorisation.
The FCA expects that number to wither to just a handful as the new rules take effect. The high street lenders may disappear altogether.
The volume of payday lending will inevitably shrink.
The thinking is that credit unions, banks even employers should pick up some of the slack but the FCA has calculated that 70,000 people will suddenly find themselves unable to borrow at all.
Of these the FCA concludes some will borrow from family, some will have no choice but to cut their spending (surely a preferable outcome to taking on unaffordable debts) and only a tiny minority (2% says the FCA) will seek the help of loan sharks.
Better the devil you know, the payday lenders argue. It's an argument easy to dismiss but has some merit.
Russell Hamblin-Boone from the Consumer Finance Association has this to say:
Three months ago the Consumer Finance Association, which represents a clutch of payday lenders, drew my attention to a series of websites that variously promise no credit checks, instant cash and offer no risk warning. They appear to be unregulated and they are still in business.
The FCA's assumption is that the vast majority of people wouldn't touch a loan shark.
Fair enough, that's what people say, but online would they know how to spot one?