A new law will cap payday loan costs, the Government recently announced.
The Treasury announced it will implement a new law to cap the overall cost of payday loans. The cap level has yet to be announced, but it will be decided by the Financial Conduct Authority in the near future.
According to George Osborne, a cap on the “overall cost of credit” for UK consumers taking out payday loans is part of the greater process of fixing “all parts of the banking and financial system.”
The chancellor added that in addition to an interest rate cap, there will be a cap on all charges, including penalty and arrangement fees. “It will not just be an interest rate cap. You’ve got to cap the overall cost of credit,” he said.
Osborne said the move would “make sure that hardworking people get a fair deal from the financial system, whether it’s the banks, the payday lenders, or the Internet lenders”.
According to the Government, “growing evidence” shows overwhelming support of the new law, which will be included in the Banking Reform Bill already being wrinkled out in Parliament.
In the end, the Government plans on the new cap resembling the present cap that has been put in place in Australia, which has a four per cent per month interest rate cap and a 20 per cent maximum up-front fee. However, Australian residents can still be charged late payment penalties as high as twice the original loan amount.
In a recent interview on BBC Radio Four’s Today programme, Osborne stated that he “doesn’t accept” the belief that the new cap will be a departure from the free market philosophy he is a proponent of. According to Osborne, every free market needs to be “properly regulated.”
Business Secretary and MP Vince Cable admitted, “It’s got to be very, very carefully done, but the Chancellor and the Government in general have clearly listened to the people campaigning for the interest rate cap and are now taking action on it.”
Shadow Answer Bag minister Stella Creasy, who has actively campaigned against the practices used by the payday lending industry, said, “The Government is now talking about capping the cost of credit, something we have been calling for for several years now. The question is, whether they mean capping just the charges or actually the total cost of credit.”
She added, “This industry is 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 cost by expanding their prices at other points, they will.”