There’s a raft of payday loans regulation changes that’s about to hit as part of a wave of enthusiasm to reform the way that short term credit is provided to consumers. The three most significant changes that are about to be introduced are the Financial Conduct Authority (FCA) price cap, the limit on rollovers and the new rules relating to a Continuous Payment Authority (CPA). But what exactly are these changes and how will they affect you?
The FCA price cap. Responsibility for the payday loans sector was transferred to the FCA in April of this year and over the summer the regulator proposed a new price cap for the industry. The price cap relates to the amount of money that consumers can be charged when borrowing payday loans, for example as interest or charges for late payment etc. The suggested cap means that from January 2015 interest and charges on new loans must not exceed 8% of the amount that has been borrowed. Fixed default fees will be capped at £15 and the cost of borrowing a payday loan will not be allowed to exceed 100% of the loan’s value. So, what does this mean for consumers? Well, initially clearly this is a positive step as it will cut the cost of borrowing payday loans. However, some have highlighted how this could have a knock on effect, making it more difficult to take loans out in the first place and making it more expensive for those who can afford it.
The limit on rollovers. At the moment it’s possible to rollover repaying a payday loan until the next repayment period if the borrower can’t afford to repay it. The new limit is designed to prevent loans being rolled over – with rollover fees and additional interest added on each time – and will restrict the number of rollovers to two, at which point the balance on the loan becomes due. This could be a double edged sword for some people – yes it will prevent a short term debt becoming a long term, much larger debt but it will also mean the loan becomes due regardless of whether the consumer can afford it. This is why it’s now even more important to ensure you can afford to repay a loan before you borrow it.
The new rules on CPAs. A Continuous Payment Authority is essentially a way for a lender to take money from the borrower’s bank account on any date that it wishes and in any amount. It’s different to a direct debit where the date and amount of payment are set in advance. The new rules mean that lenders must inform a borrower when the payment is going to be taken and how much it will be. There is also a limit on the number of times a lender can try and take money via a CPA – two failed attempts is now the maximum. Rather than continuously trying to take the money the lender must now contact the borrower and find out why the payment has not been made. This is a positive step for many borrowers living close to their budgets as it means that a surprise CPA won’t suddenly cause an account to go overdrawn or other essential payments to be missed. However, it does mean that lenders will become involved more quickly where a CPA has failed than was the case before – whether this is positive will depend on how the lender deals with the situation.