Payday loan customers will see the fees and interest they pay capped, amid moves to stop such debts spiralling out of control.
The new rules - which have just come into effect - mean that people using payday lenders and other short-term credit providers will generally see the cost of their borrowing fall and those who cannot afford to repay their debt on time will never pay back more in charges than the sum they initially wanted to borrow. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
The Financial Conduct Authority (FCA), which oversees the industry, said the move will lower costs for most borrowers and ensure that charges are proportionate to the size and duration of the loan.
Default fees for borrowers who fail to repay on time will be capped at £15 under the measures, which are the latest in a string of clampdowns on the sector.
The new rules mean that, for example, if someone borrows £100 for 30 days and pays back on time, they will not be charged more than £24. Someone who borrows £100 but struggles to repay their debt will never pay back more than £200, including fees and charges.
Martin Wheatley, chief executive of the FCA, said the payday loan cap will make the cost of a loan cheaper for most consumers. “Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control - no consumer will ever owe more than double the original loan amount,” he said.
Consumer group Which? said its research suggests that in 2014, an average of 880,000 households took out a payday loan each month.
It has been running a “clear up credit” campaign and said the regulator should now look to make it easier for people to compare the cost of different types of debt, including unauthorised overdrafts and credit cards.
Which? executive director, Richard Lloyd, said: “The crackdown on the payday lending market comes not a moment too soon. Lenders must now start competing on price and treating their customers fairly.
“The regulator has clearly shown it’s prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review.
“It’s now time to turn the spotlight on unfair practices in the wider credit market. We want to see an end to excessive fees that also make it hard to compare different loans, including those charged for unauthorised overdrafts and credit cards.”