Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@. Skimlinks & other affiliated links are turned on

Search
  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 25th Nov 13, 10:59 AM
    • 2,324Posts
    • 971Thanks
    Former MSE Helen
    MSE News: Finally! Government to cap costs of payday loans
    • #1
    • 25th Nov 13, 10:59 AM
    MSE News: Finally! Government to cap costs of payday loans 25th Nov 13 at 10:59 AM
    "George Osborne has today announced a cap on the costs of controversial payday loans..."

    Read the full story:

    Finally! Government to cap costs of payday loans




    Click reply below to discuss. If you havenít already, join the forum to reply. If you arenít sure how it all works, read our New to Forum? Intro Guide.

Page 1
  • John1993
    • #2
    • 25th Nov 13, 11:00 AM
    • #2
    • 25th Nov 13, 11:00 AM
    It'll be interesting to see the effect. I'd imagine that one response by the lenders will be to drop the shorter-dated loans, as these give the most distorted APRs. 1% per day for a week gives 3,400%, 1% per day for a month gives 2,500%, and 1% a day for three months gives 1,400%.

    It'll also probably see a tightening of lending criteria, so fewer people wil be able to access the products. It's not clear if this is a good thing or not, as we don't know how many will respond by managing their money better, and how many will turn to loan sharks or crime.
    • fermi
    • By fermi 25th Nov 13, 11:05 AM
    • 39,669 Posts
    • 47,650 Thanks
    fermi
    • #3
    • 25th Nov 13, 11:05 AM
    • #3
    • 25th Nov 13, 11:05 AM
    And this is the FCA's already stated opinion on caps.

    http://www.fca.org.uk/static/documents/consultation-papers/cp13-10.pdf


    Alternative options

    Price cap on the total cost of credit – The benefits of a total cost of credit cap has been
    looked at by the Personal Finance Research Centre at the University of Bristol. This report
    highlighted that 17 EU member states have some form of price restriction. Their research was
    ambiguous, on the one hand suggesting possible improved lending criteria and risk assessments.
    On the other, prices may drift towards a cap, which could lead to prices increasing or lead to
    a significant reduction in lenders exercising forbearance.55 Neither of these outcomes latter
    would be beneficial for consumers. Clearly this is a very intrusive proposition and to ensure we
    fully understand the implications we have committed to undertake further research once we
    begin regulating credit firms and therefore have access to regulatory data.

    Cap on loan amount – Some American states have taken further steps to address inadequate
    affordability assessments by setting caps on the maximum loan amount, either as a total
    (e.g. $500) or as a proportion of income (e.g. 25% of income). However, the level of limits
    chosen in these states has been criticised by the US consumer group the Centre for Responsible
    Lending.56 This is because limits do not take into consideration the borrower’s other obligations
    and expenses.
    I'm a Board Guide on the Debt-Free Wannabe, Bankruptcy, Credit Cards and Loans boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Board guides are not moderators. If you spot an inappropriate or illegal post then please report it to forumteam@moneysavingexpert.com

    Free/impartial debt advice: National Debtline | StepChange Debt Charity | Find your local CAB

    IVA & fee charging DMP companies: Profits from misery, motivated ONLY by greed
    • Sparhawke
    • By Sparhawke 25th Nov 13, 11:15 AM
    • 1,391 Posts
    • 2,383 Thanks
    Sparhawke
    • #4
    • 25th Nov 13, 11:15 AM
    • #4
    • 25th Nov 13, 11:15 AM
    I am always dubious on these caps, especially as it doesn't look like anything will be done about them rampaging through our streets at will.

    If the government does cap them, everyone knows that they will basically charge everyone the absolute highest they can, and shorten the payment length and we will be in no better position than before.

    Fermi or Helen, if you read this you can close the other topic I made, 20 minutes before this one opened
    "Don't blink. Blink and you're dead. They are fast. Faster than you can believe. Don't turn your back. Don't look away. And don't blink. Good Luck" - The Doctor.
  • Soulglo
    • #5
    • 25th Nov 13, 11:45 AM
    • #5
    • 25th Nov 13, 11:45 AM
    Pay-day loan companies did not come out of nowhere. In the late 1990's Brown/ Blair made changes to the Consumer Credit Act, which up until then had held very high interest rates unlawful. This paved the way for this type of business to be started.

    We don't need a new law to cap interest rates, we just need the old wording of the Consumer Credit Act to be reinstated.
    • SoWhatIsNext
    • By SoWhatIsNext 25th Nov 13, 12:19 PM
    • 65 Posts
    • 140 Thanks
    SoWhatIsNext
    • #6
    • 25th Nov 13, 12:19 PM
    • #6
    • 25th Nov 13, 12:19 PM
    If pay-day lenders are such rip-off merchants with sky-high margins, why haven't there been a flood of new companies offering lower rates and undercutting them?

    Whether you like it or not, pay-day lenders do serve a purpose. Restricting the rates (and therefore the risk the companies are prepared to take) will just drive people who now can't get the loans into the hands of loan sharks who of course have no regulations.

    If there were more regulations in regards to making sure everyone who takes out a loan is given information on where to go to get help if you are in debt troubles, I could agree with that.
    • Rafter
    • By Rafter 25th Nov 13, 1:09 PM
    • 3,837 Posts
    • 1,366 Thanks
    Rafter
    • #7
    • 25th Nov 13, 1:09 PM
    • #7
    • 25th Nov 13, 1:09 PM
    At last - a cap as suggested with a maximum 20% up front fee then 4% a month seems to ensure that you don't pay back more than twice what you borrowed over a 12 month period which seems like a sensible 'maximum' for any consumer credit product.

    It needs to be 'fair' to both consumers and different types of lenders though.

    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.

    2) The bill also needs to include a recommended penalty charge cap and confirm that irregular charges or penalties for breaching the terms of your account need to reflect the cost as required under contract law. I'd suggest a maximum of £5.

    3) The 20% up front fee needs to be capped at £25 maximum and a maximum of say £120 per year with the same lender to prevent someone paying multiple up front fees to the same lender for revolving short term credit.

    4) A 'future conduct risk' clause needs to be included so that any other creative charges or fees banks of payday lenders come up with to circumvent these rules are ringfenced while the FCA and courts investigate their legality and compliance with the spirit of legislation. The ringfenced fees would then be refunded in full to customers if found to be simply profiteering or rule avoidance rather than genuinely of value to competition and consumer choice.
    Smile , it makes people wonder what you have been up to.
  • John1993
    • #8
    • 25th Nov 13, 2:48 PM
    • #8
    • 25th Nov 13, 2:48 PM
    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.
    Originally posted by Rafter
    I susppect, if this was introduced, that you'd rapidly see banks simply refusing to allow any payments that resulted in an unauthorised overdraft, followed by accounts being closed.

    This may not be popular with the people whose gas bills, loan payments, or council tax were previously being paid through this route.
    • Rafter
    • By Rafter 25th Nov 13, 3:07 PM
    • 3,837 Posts
    • 1,366 Thanks
    Rafter
    • #9
    • 25th Nov 13, 3:07 PM
    • #9
    • 25th Nov 13, 3:07 PM
    I susppect, if this was introduced, that you'd rapidly see banks simply refusing to allow any payments that resulted in an unauthorised overdraft, followed by accounts being closed.

    This may not be popular with the people whose gas bills, loan payments, or council tax were previously being paid through this route.
    Originally posted by John1993
    John,

    Accept your point but just trying to be 'fair'. Why should a payday lender be 'capped' but a bank is allowed to charge a lot more for the equivalent loan.

    I have no problem with charges for unathorised overdrafts but they have to be proportionate to the cost and risk taken by the bank. Otherwise they are simply used to subsidise other customers.

    In the examples you give you are suggesting bills of £100's which would result in much higher fees than my illustrations if the cap was 20% of the unauthorised overdraft amount.

    It should never be 'cheaper' for a customer to use a payday loan than their own bank as a result of regulation - which is partly why the payday loan industry has grown so big. If banks charged more realistically, provided a more convenient service then no payday lender would be able to compete.

    R.
    Smile , it makes people wonder what you have been up to.
    • N1AK
    • By N1AK 25th Nov 13, 3:26 PM
    • 2,851 Posts
    • 3,795 Thanks
    N1AK
    1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.
    Originally posted by Rafter
    No problem. The bank will either charge you a fee for having an account with a nice low overdraft fee or not give you an overdraft. Stop banks from charging enough for unauthorised overdrafts and they'll just refuse to make payments that would take you into it; you can then deal with a pee'd off company who you won't pay.

    The problem with all these suggestions. Including the current payday cap being proposed is that they are pie in the sky ideas. Do you have any idea what the default rate, admin costs etc of running a payday lender are and if not then what makes suggesting a £25 cap any more insightful than proposing that every payday borrower gets a free Porsche thrown in with the loan

    Put caps on lending and:
    1. They'll move costs somewhere else if possible
    2. If they can't then they'll restrict lending
    3. The people who can no longer borrow can then...

    The payday lender market may well be full of parasites but it's a competitive market of parasites. If reasonable profits could be made lending to the same people with lower costs then the market would be driving costs down.
    Having a signature removed for mentioning the removal of a previous signature. Blackwhite bellyfeel double plus good...
  • John1993
    John,

    Accept your point but just trying to be 'fair'. Why should a payday lender be 'capped' but a bank is allowed to charge a lot more for the equivalent loan.
    Originally posted by Rafter
    They probably shouldn't be, but if capps are broughht in I expect that in both cases (payday lenders and overdrafts) that there will be a slew of customers who are not happy with the outcome.

    I suspect that there's a belief out there on the streets that capping the rates / overdraft charges means that the service will still be available, just cheaper, which may well not be the case.
  • Nice Weather For Ducks
    I think overall this is a good move, because it will force PDL companies to look a little bit more carefully at applications for affordability.

    I would say there will be quite a drop in the number of customers being accepted after the new rules come in.

    I think they also need to make broker fees illegal as so many people get virtually scammed by these companies.

    Brokers should be paid fees by the loan company they introduce their client to.
    • JuicyJesus
    • By JuicyJesus 25th Nov 13, 4:34 PM
    • 3,503 Posts
    • 4,010 Thanks
    JuicyJesus
    Brokers should be paid fees by the loan company they introduce their client to.
    Originally posted by Nice Weather For Ducks
    That is the exact model the Retail Distribution Review was intended to put a stop to in the field of investments and pensions.
    urs sinserly,
    ~~joosy jeezus~~
    • Alpine Star
    • By Alpine Star 25th Nov 13, 4:40 PM
    • 1,259 Posts
    • 611 Thanks
    Alpine Star

    The payday lender market may well be full of parasites but it's a competitive market of parasites.
    Originally posted by N1AK
    Competitive markets don't usually get referred to the Competition Commission for investigation http://www.competition-commission.org.uk/our-work/directory-of-all-inquiries/payday-lending
    • chanz4
    • By chanz4 25th Nov 13, 5:03 PM
    • 10,028 Posts
    • 2,985 Thanks
    chanz4
    So are they going to look at provident also? As there fees are sky like vanquis their card.

    All this will do is make people bankrupt quicker, or crime go up. Companys wont risk as much
    Don't put your trust into an Experian score - it is not a number any bank will ever use & it is generally a waste of money to purchase it. They are also selling you insurance you dont need.
    • gadgetmind
    • By gadgetmind 25th Nov 13, 5:52 PM
    • 10,918 Posts
    • 8,907 Thanks
    gadgetmind
    1) Borrow some emergency money.
    2) Pay of debt come pay day.

    No problem. What is a problem is people who miss out step 2.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
    • jonesMUFCforever
    • By jonesMUFCforever 25th Nov 13, 6:02 PM
    • 25,850 Posts
    • 13,054 Thanks
    jonesMUFCforever
    Do you know what I think is the major problem today? It is not the interest charged or the stupidity of people borrowing knowing they can't pay it back BUT the passing around of debit card numbers by ''brokers'' and the unauthorised fees of £69 or so debited to accounts.

    These new proposals won't change this at all.
    What goes around - comes around
    give lots and you will always receive lots
    • rizla king
    • By rizla king 25th Nov 13, 6:43 PM
    • 2,843 Posts
    • 1,903 Thanks
    rizla king
    So are they going to look at provident also? As there fees are sky like vanquis their card.
    Originally posted by chanz4
    The powers given to the FCA by the Financial Services Act 2012 to make rules were very general. Simply allowing them to prohibit authorised companies and people from making credit agreements where charges/interest exceed a certain level. So they could easily include doorstep/home lending etc in any new set of rules.
    • brendon
    • By brendon 25th Nov 13, 8:09 PM
    • 503 Posts
    • 444 Thanks
    brendon
    1) Borrow some emergency money.
    2) Pay of debt come pay day.
    Originally posted by gadgetmind
    3) Rinse. Repeat.
    • JuicyJesus
    • By JuicyJesus 25th Nov 13, 8:36 PM
    • 3,503 Posts
    • 4,010 Thanks
    JuicyJesus
    So are they going to look at provident also? As there fees are sky like vanquis their card.

    All this will do is make people bankrupt quicker, or crime go up. Companys wont risk as much
    Originally posted by chanz4
    Indeed. People who criticise payday loan rates generally do not understand the concept of rating for risk.

    More risk = more reward needed to justify the increased risk = higher interest rates. Short term lending is risky; very short term lending is even riskier; emergency very short term lending is risky as hell. And that's even before you start to factor in the fixed costs of providing a loan.
    urs sinserly,
    ~~joosy jeezus~~
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

3,168Posts Today

4,456Users online

Martin's Twitter
  • Oh if only one were brave/honest enough to say "my mental health" - in answer to the weakness question. I say this? https://t.co/RyihpzwPdY

  • Been out with the little one, just got back and turned the #c4debate on. What have i missed? Who is winning?

  • It's the weekend, it's the weekend, yay. It's that moment, when as usual, to sign off for family time. So I bid y? https://t.co/2RYRnz3fEe

  • Follow Martin