Alternative forms of lending rise as payday cap bites
Guarantor lenders and pawnbrokers are amongst those reported to have benefitted from payday lending becoming less attractive in recent times.
Since January 2 2015, payday lenders have been subject to a charge cap. They can now charge only 0.8% interest per day, meaning that the repayment amount on a £100 loan taken out for 30 days, and repaid on time, cannot exceed £24.
Default fees are now capped at £15, while no borrower can ever be asked to pay more in interest and charges than the amount of their loan, regardless of how late the repayment is made.
David Patrick, chief executive of leading pawnbroker Cash Converters, has predicted that retail outlets that offer payday loans alongside other credit products will soon enter the market.
The UK’s largest payday lender, Wonga, has announced that it has reduced its daily interest charge from 1% to 0.8% in order to comply with the cap. This means that its Annual Percentage Rate has fallen from 5,853% to 1,509%, and that the repayment on a 30 day £100 loan is now £24 instead of £37.15. The lender has also reduced its default fee from £20 to £15.
The Consumer Finance Association (CFA) has said that all of its members, including Peachy, QuickQuid, Dollar Financial and The Money Shop, were all fully compliant with the new requirements.
“This is the start of a new era for short-term lenders who are operating in an entirely new lending landscape under the FCA”
said Russell Hamblin-Boone, chief executive of the CFA.
“We expect to see fewer people getting loans from fewer lenders and the loans on offer will evolve but will fully comply with the cap. The commercial reality is that the days of the single-payment loan are largely over – payday loans are being replaced by higher value loans over extended periods.”
It remains to be seen how many lenders can continue to operate a viable business now these restrictions are in force. When the Financial Conduct Authority (FCA) first announced the details of the cap, it estimated that 70,000 people – 7% of current payday loan borrowers – would be unable to obtain a loan as a result. Speaking to BBC Radio 5 Live’s breakfast show, FCA chief executive Martin Wheatley seemed relatively unconcerned about some firms going out of business. Reacting to suggestions that all but a few lenders would cease trading as a result of the cap, he said:
“I don’t think we’d have a problem if there was a lot less than [the current 70 or so active payday lenders] … provided that what was left was actually treating people responsibly.”
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