Category: Payday Loans

The government is to introduce a new law to cap the cost of payday loans.

The level of the cap, which has not yet been announced, will be decided by the new industry regulator, the Financial Conduct Authority (FCA).

The Treasury says there is “growing evidence” in support of the move, including the effects of a cap already in place in Australia.

But the industry said the move could restrict credit, and encourage more illegal lending.

The cap will be included in the Banking Reform Bill, which is already going through Parliament.

Speaking to the BBC, the Chancellor, George Osborne, said there would be controls on charges, including arrangement and penalty fees, as well as on interest rates.

“It will not just be an interest rate cap,” he told BBC Radio 4’s Today programme.

“You’ve got to cap the overall cost of credit.”

‘Duty on regulator’

Previously the government had said such a cap was not needed.

But the chancellor denied the government had a made a U-turn on the issue, saying he was not pre-judging the outcome of a Competition Commission inquiry into payday lending.

“These things can go along in parallel,” he said.

Some payday lenders have been criticised for charging more than 5,000% annual interest – though the lenders say these loans are meant to be short-term, so the annual rate can make charges appear worse than they are.

Australia has an interest rate limit of 4% per month, after a maximum up-front fee of 20%.

However, even in Australia, borrowers can still face hefty charges.

Penalties for late payment are allowed to be as much as twice the loan amount.

In the UK, the FCA has already been given the power to cap the costs of payday loans.

But under the new law, the FCA will now have a duty to go ahead and introduce price controls.

“Now the regulator will go away and decide what is the best form of cap,” said Mr Osborne.

The FCA takes over as the industry regulator in April 2014, so no changes are expected before 2015.

Reservations

The FCA has also proposed a series of measures to clamp down on the industry, including limiting loan roll-overs to just two, and restricting the use of continuous payment authorities (CPAs).

But the Consumer Finance Association (CFA), which represents some of the payday lending firms, was sceptical about whether price controls would work in consumers’ interests.

It said the move could encourage more illegal lending.

“Research from other countries where a cap has been introduced, suggests price controls would lead to a reduction in access to credit, and open up a larger market for illegal lenders,” a spokesman said.

The FCA itself has also expressed reservations about a cap on charges, fearing that some lenders might increase fees to the legal maximum.

Labour leader Ed Miliband has already said his party would cap the cost of payday loans.

Mr Miliband has also pledged to give councils new powers to limit the spread of payday lending shops in town centres.

The shadow minister for competition and consumer affairs, Stella Creasy, told the Today programme that “the devil really is in the detail”.

“This industry’s a bit like an inflated balloon and if you don’t crack down on the whole cost of credit, then wherever they can recoup their costs by expanding the prices at other points, they will.”

[BBC News]

If you’re struggling with your finances, a quick and easy payday loan can seem like a good option. But there are many other far cheaper alternatives.

Payday loans have been heavily in the spotlight this week. First, Wonga went on a PR offensive, premiering a film called 12 Portraits which featured 12 of its customers. Then there was a string of interviews in which the company’s Niall Wass told anyone who would listen the majority of Wonga’s customers were happy with its service.

Then representatives of three of the biggest payday lenders were grilled by a committee of MPs and naturally defended the industry and its practices.

While the industry may have cleaned up its act compared to a year ago, the simple fact remains that payday loans are an extremely bad way to borrow. Several mortgage brokers have also spoken about the detrimental effects using payday loans can have on any future mortgage application, as lenders see them as a sign of desperation and an inability to manage money.

But if money is really tight, what are the alternatives?

First steps

Cut your spending and budget

This should be the first thing you should do.Just looking at your monthly spending habits can make you realise you need to cut some things out completely. And if you’re using payday loans to pay off for nights out and new clothes then you’re already in deep trouble.

A budget can get you back on track so you have enough for both bills and treats.

Why not check out our free, secure Money Track budgeting tool?

Take out a 0% credit card

If you have a good credit rating but your debts are slowly mounting up and you’re only able to make the minimum payment on your credit card or you have a large overdraft, a 0% credit card could give you some valuable breathing space.

If you have card debts you want to transfer, you could get up to 30 months with no interest to pay using a 0% balance transfer credit card. All you have to pay is a fee, which is a small percentage of the debt you’re transferring.

If you have an overdraft, you can take a card that offers a 0% money transfer period. This allows you to transfer money into your current account and it will just cost you a percentage of the amount you’re borrowing (usually 4%). At the moment, you can get a 0% money transfer for 27 months with the MBNA Platinum and Fluid 27-month cards. Compare 0% credit cards

Ask for a pay advance

The best payday loan could come direct from your employer.

Asking for an advance on your wages could mean you meet the shortfall an unexpected bill or car repair causes, without the risk of falling into a pit of debt. Companies with a good cashflow may be willing to pay an advance on your wages and usually take the amount out of your next payslip.

Another way your employer may be able to help is by allowing you to do some overtime to boost your pay.

Turn to friends and family

Turning to your family or even your friends for a loan could prevent you from falling into a spiral of debt. They may even be able to lend you the money interest free.

Just remember to treat paying back a friend or family member as seriously as you would an official lender. After all, you don’t want them to fall into debt because you haven’t lived up to your side of the deal. If you want to make it official and reassure those close to you that you will repay, write down an agreement clearly marking the exchange as a loan not a gift.

Sell some old stuff

From CDs to DVDs, games to gadgets, if you have things you don’t use that could be cashed in then now is a good time to do it.

You could sell them online on sites such as eBay or Amazon or in high street shops such as Cash Convertors or Cash Generator.

Ask your bank for an authorised overdraft

An authorised overdraft with your bank is an alternative form of borrowing that is far more affordable than a payday loan.

Overdrafts that are agreed formally, rather than used accidentally, which are known as unuathorised overdrafts and can cost a small fortune, typically have rates between 12% and 20% AER. However, the Nationwide FlexDirect account offers a fee- and interest-free overdraft for a year, so long as you pay in £1,000 a month to the account.

Next steps

If money is still tight after you’ve exhausted all the options above, then find out if any of these are viable.

See if you’re entitled to benefits

The benefits system in the UK is highly complex, so many of us are unaware of the benefits we may be entitled to.

If you are pregnant, on a low income, caring for someone, have been bereaved, aged 60 or over, ill or disabled or even if you are unemployed then there is a chance that you could be entitled to a range of benefits such as Working Tax Credit, Child Benefit, Income Support, or Jobseeker’s Allowance.

Use this handy benefits checker on the Gov.UK website to double check you are claiming all the benefits you qualify for.

Apply for a credit union loan

Credit unions are not-for-profit, community-based organisations that provide transparent savings accounts and affordable loans to its members. Credit unions have a common community bond, so you could find yours where you live or where you work.

Many of them now offer payday loans at far lower rates than payday lenders. The only catch with credit unions is you often need to be a member before you can borrow.

To search for your nearest, use the Find Your Credit Union website.

Look into a budgeting loan

A budgeting loan is available from the Government to those on income support, income-related employment/support allowance, income-based jobseeker’s allowance and pension credit and is available if you need to pay for a particular range of expenses.

The loans are between £100 and £1,500, are interest free (so you only pay back the amount you borrowed) and you have two years in which to pay them off.

Seek free debt advice

If your finances are out of control and you consistently turn to payday loans, you should seek advice. There are a number of charities that are dedicated to helping those in financial difficulty such as StepChange Debt Charity, National Debtline and the Citizens Advice Bureau.

Wonga, the highly controversial payday lender, made a profit of £84.5m last year as the business continued to grow in the UK as well as overseas.

The company, which has been criticised by the Archbishop of Canterbury over the summer, saw profits rise by 35% as customer numbers boomed. They releasing their annual accounts this morning, Wonga said it made a pre-tax profit of £84.5m last year, up from £62.4m in the previous year. Net profit rose 36% to £62.5m.

The increase came on the back of a 68% increase in lending, to £1.2bn. More than one million customers borrowed from Wonga, whose annualised percentage interest rate is above an astonishing 4000%. Turnover rose 67% to £309.3m in the year. In an attempt to deflect some of the negative comments the profits are likely to draw, Wonga highlighted that it paid more than £21m in corporation tax in the UK last year.

In addition to the UK, where it made 3.8m loans last year, its consumer business has expanded in to South Africa, Poland, Spain and Canada. As well as its consumer loans business, Wonga expanded by opening a loans for business arm last year. The company also launched a product for the online retail payments market.

Chairman Robin Klein said: “Wonga’s profitability during 2012 was the result of the large scale of our operations and an unflinching commitment to provide a flexible and convenient service designed around customers.”