Experts have predicted that the latest proposed capped rate of 0.8% on payday loans will shrink the industry by 42%. So what does this mean for borrowers? The capped rate is designed to protect borrowers from paying back more than they need to.
However, there is a concern that it will force some lenders to close down, leaving fewer options for those who need emergency cash.
How will it affect borrowers?
According to the BBC, it’s thought that the new cap will come into place in January 2015. Along with the 0.8% cap, there will also be a limit placed upon default charges for those who get into financial difficulties paying back the loan. This is due to be set at £15 maximum.
The changes are said to be a move forward for those who struggle to pay back their payday loan.
What the capped rate means is that for all rolled over or new loans, the interest and fees mustn’t be more than 0.8% of what the customer has borrowed. Say for example you borrow £100, when the new rates kick in you won’t need to pay more than £24 interest.
Then, if you do struggle to repay the loan back on time, the fee charged by the company to extend the loan can’t add up to more than £15.
The borrower will also never have to repay more than they actually borrowed in fees and charges. So taking the example that you do borrow £100, you’ll never have to repay more than £200 no matter how long it takes you to repay the loan.
Changes are constantly being made to the industry. It wasn’t long ago they were altered so that borrowers couldn’t extend their loan more than twice.
The changes in regulation forced a lot of payday lenders to close down. It’s only been top, reliable lenders that have managed to survive the alterations.
Wonga is one such company which has kept up with regulations and still managed to help those who need it most. Providing money into your account within 15 minutes, the company allows you to repay the loan early and makes their payment terms crystal clear right from the start.
However, while in theory the new capped rate should help borrowers, there’s a fear it could cause many people to turn to loan sharks instead.
Could these caps have a negative impact?
There is some concern that the caps could have negative consequences for borrowers. For example, the cap will significantly cut payday lenders profits.
While major lenders such as Wonga will no doubt survive the loss in profits, smaller lenders will be forced out of the business. This means some borrowers may find it more difficult to get their hands on the money they need.
Regulations that were recently introduced meant payday lenders had to crack down on who they leant money to. So if the smaller lenders were to close their doors, it could leave some of the most vulnerable people unable to get the money they need. This could tempt them into turning to loan sharks. While some people will find it more difficult to get a loan, overall it is thought that the cap won’t affect the majority of people.
The new cap will also fool some people into thinking payday loans are a lot cheaper to take out. While money will certainly be saved, borrowers still need to know that payday loans are an expensive option.
Before taking out a loan, you need to ask yourself whether you’ll still be struggling next month. They are designed for short term, one off emergency situations. If you’re likely to be in trouble the month after too, a payday loan could get you into further financial trouble. Always take this into account before you decide to borrow.
Overall, the new capped rates should make a significant difference to the payday loan industry. While there’s no denying they will hinder some borrowers from getting the help they need, the majority of people will experience only positive changes.
Despite the lower rates, it’s still advisable to be 100% sure that you can afford a payday loan before you take one out. Responsible lending is the main thing that will have a positive impact on the industry; not just capped rates.
Terence James is an experienced financial advisor. He uses his blog to provide quality advice to people struggling with debt.