Payday loan price cap and why it will backfire

FCA has confirmed that the Price Cap for Payday Loans is to be capped at the rate described in the original consultation. The FCA’s claim that it will save customers £150 a year is laughable in the extreme. It won't save people anything as they simply won't get access to them now. The FCA haven't accounted for a rise in bank charges for unpaid direct debits etc. This claim is a very short sighted one in our opinion.

We also have to listen with astonishment as the head of the FCA claimed that there was no evidence that people would turn to illegal lenders.

Really?  Seriously?

The first stage of the FCA’s rule came in on July the 1^st, this cut off credit to around 35% of payday borrowers. Well what’s happened since the 1^st of July? Well the number of complaints about broker sites and upfront fees has rocketed. These sites are operating outside the FCA already, fraud has also risen dramatically.

Technically the FCA are right and granted they are not unlicensed lenders, they only actually dodge that definition because these illegal sityes don’t actually lend anything – it’s a scam. They are actually unlicensed lending sites that take advantage of the desperation of borrowers by appearing to be lenders. They take money / admin fees from people who have been turned down for loans and promising them a loan.

That statement from the FCA is nonsense.

The other strange statement from the FCA is “fewer lenders” in the industry being better for consumers. The FCA seems to claim that less competition means better service and choice! Well the big six energy firms just love statements like that.  

Looking at this logically, this Government they have taken something that was voluntary (nobody forcing anyone to take a loan) with hundreds of competitors, and regulated it with price caps but then turned a blind eye to price caps on something that is involuntary (everyone needs gas and electric) with just six competitors and said carry on ripping people off.

We don't want to spend a lot of time on the FCA though. By the way we only disagree with their policy’s. The agency itself is highly professional with great knowledgeable staff and a big step up from the OFT. There is a case for a strong FCA and we wish them well. Whenever we have dealt with them we have always found them to be really easy to contact and talk to.

What Now For Payday Lenders?

The lenders who used to offer Payday loans must be high fiving each other today. But just why is the death of the Payday loans sector great news for payday lenders?

The market for loan products to subprime customers has already moved from Payday loans sector, the ship has sailed – subprime payday loans are dead. Anyone that gets accepted on a Payday Loan now would almost certainly be approved for a credit card from one of the sub prime cards.

Payday Loan companies have seen this coming for years. Every Payday lender has a non Payday loan brand that lends to subprime customers on terms over 12 months.   As we described in this article "Have the FCA been conned Over Payday Lending"

For the last 6 months these lenders have been focusing on these new loan products which are “crushing” – and we do mean “crushing” – to members of the public.  They aren’t crushing in terms of APR but they are crushing in real world costs of the actual cost of borrowing.

One of those new loan products is the 12-24 month loans, it’s hard for us to explain just how punitive these things are. Sure they are about 100% APR instead of 4000% APR. But the loan is over a year or two, not a month. Remember that because it is over 12-24 months, that is 12-24 times it rolls over. Before the price cap the limit was 2 on payday loans - more madness. Finance campaigners have done a number on the people they were trying to help.

The things are so attractive even 118118 have got in one the act. That’s right, the new rules are now so profitable that 118118 are involved! That is a phone directory now selling loans? That’s how screwed up things are now – The way the media is going on, most people would think that the lending industry is in trouble – it isn’t, it’s growing!

Here is 118118’s breakdown of costs.

"Representative example: Amount of credit £1,500 for 2 years. Interest rate: 71.3% pa (fixed). 24 scheduled monthly payments of £118.88. Total amount repayable: £2,853.12. Representative APR 99.9%."

Yep you read it right, that’s £1353 profit if everything is paid back on time (which around 40% of people won’t). Wonga used to make about £150 on a average loan. Some poor chap who may have only wanted to borrow £300 is now paying interest on £1500 because the lenders who used to lend £300 have gone because they can’t pay the credit check fees, processing fees, and staff fees from the profit on a £300 loan under the new rules.

This is insane!

118118 isn’t alone neither, they are not even the most expensive. It’s as though someone has picked up the whole Payday Loan industry and moved it from one month to 12 months and everything continues on as before – only more costly to the public - it’s almost comical.

Now I’m sure the like of Martin Lewis will be celebrating some kind of defeat by of the Payday Industry, breaking open a bottle of champagne and all that. Well he won’t be the only ones, the Payday Lenders will be celebrating, the illegal sites will be celebrating. The only ones who won’t be celebrating here is the public.

The FCA have promised to review the cap in 2017 – We’d have a wager that they review it a lot quicker than that.

Key Points to watch out for

* Customers will now have to borrow higher amounts as lenders can't make profit on lower value loans. Even though they may only need to a lower amount.

* APR's will fall but borrowers real cost of borrowing is massively higher as loans are over longer periods of time.

* Rise of unlicensed broker / admin fee scams to grow

* Instances of bank charges or failed Direct Debit Charges to rise 

* Rise of loan sharks. FCA forecast  around 10% of those that now won't have access to credit will turn to loan sharks. They quote that 70,000 now have no access to credit because of the clampdown. This means that even they expect around 7,000 people to turn to loan sharks.