It hasn’t been all that long that the term payday loans and loan shark could almost be used synonymous . The market was awash with over inflated interest rates and incredibly high fee’s and charges. One prominent online loan site in the UK listed APR’s of almost 5000% just a couple of years ago! Now that same site is down to only 1509% APR. Not great, but definitely an improvement for the consumer.
This simple example of drastic APR drops is due to several factors. The biggest cause of this drop was the FCA rulings on price caps for short term loans. This ruling had heavy impact on the industry almost immediately with several companies simply closing their doors rather than take less profit. While it had a negative impact on loan companies bottom lines, it had a positive impact on consumers who were in need of a loan quickly. While interest rates still seem absorbent at least now they are more manageable when it comes to the borrower being able to repay as agreed.
There was a negative impact of price caps on the consumer side however; people seemed to be more willing to borrow larger amounts as long as the interest rates seemed lower. Consumers have always borrowed more than they knew they could reasonably be expected to repay in a short period of time but with the lower interest rates these numbers grew. Overall though it was a positive outcome for consumers.
FCA Price Cap Highlights
- Initial cost cap of 0.8% per day – Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
- Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
- Total cost cap of 100% – Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.