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Up to 99% of payday loan companies may close

Cost of credit to be capped by the FCA in 2015: Is this the end of the payday loan industry?

Wonga clears 330,000 debts

Up to 99% of the UK’s 400 payday lenders are likely to shut down after new regulations come into effect in January, according to the Financial Conduct Authority (FCA).

This comes days after the announcement that the UK’s largest payday loan company, Wonga, will write off 330,000 loans as part of an agreement with the FCA. But, the plans to clean up the consumer credit industry with tighter lending regulation and caps on the cost of credit have been in the works for over a year.

Cost of credit capped

In July 2014 the FCA announced that from January 2015, interest and fees must not exceed 0.8% per day of the amount borrowed. Fixed default fees cannot exceed £15 and the cost of a payday loan cannot exceed 100% of the amount borrowed.

In the words of Martin Wheatley, the FCA’s chief executive officer, “…we are ensuring that someone borrowing £100 will never pay back more than £200 in any circumstance.”

Only four survivors

The FCA announced that there are likely to only be four survivors in the industry after the new cap comes into play;

“…the three largest online firms will be able to continue to offer high-cost short-term credit, and. . . it is possible that one high-street firm may be able to operate,” they said.

They estimate that firms will lose approximately £420m of annual revenue across the sector.

Driving up standards in the payday loan industry?

The credit cost cap could be the killer blow of the FCA’s ongoing mission to drive up standards in the financial sector.

Payday loan companies typically offer small short term loans at high interest rates, sometimes as high as 5000%. As a consequence the sector has come under fire for being exploitative.

Wonga has been flagged up in the past for using “…unfair and misleading debt collection practises.”

Research from uSwitch found last year that 49% had a positive experience with a payday loan lender, Clive Adamson, director of supervision at the FCA, believes that “…firms still have a way to go to meet our expectations.”

Bigger questions around consumer credit

The credit cost cap are part of the long-term aim of the FCA to create a fair and transparent consumer credit industry.

However, David Mann, Head of Money at uSwitch, says the FCA reforms, whilst good for consumers, won’t solve the escalating need for short term loans:

“Those most in need of money, often with poor credit ratings, have been turned away from the banks and left to feel they have no other option. There is a bigger question that needs to be asked around the growing need for short term credit,” he said.

Alternatives to payday loans

  • Authorised overdrafts – Authorised overdrafts charge an APR of around 15-30%, which is much cheaper than a payday loan, even after the FCA’s reforms come into effect in January. Take a look at our current account comparison to compare bank accounts with authorised overdraft facilities.
  • Credit cards – These are good for a short term borrowing alternative to a payday loan. APR will be around 30-40% at the highest, but can be as low as 6.6%. Credit cards can be used for purchases, or balance transfer cards can hold debt to clear existing cards. Low APR credit cards are the best ‘all round’ credit card type for sustained borrowing. There are many different credit cards available, many feature an interest free period, but a credit building card could be useful for those with bad credit.
  • Get debt help – If you are in financial difficulties, before you borrow money or take out a cash loan, our debt management guides and articles offer information  that could help you get back on track.
  • Rainman

    tA chap said on the television the other nigh ” we have no coal in this country ” what a blithering idiot, we are sat on billions of tons of coal, some of it just a few feet underground.

    In the future if nothing is done to produce this into clean coal, we will be held to ransom by other countries. Me I’m ripping out the gas fire and going to dig for peat on the moors !