As of 2 January customers will never have to pay back more than double what they borrow
Payday loan firms will no longer be able to rip their customers off when charging for short term credit.
The Financial Conduct Authority (FCA) announced a new cap on what the lenders can charge will be put in place on 2 January, 2015.
Interest and fees must not exceed 0.8% per day of the amount borrowed, default fees for non-payment can be no more than £15 and borrowers must never have to pay back more in fees and interest than the amount borrowed.
The regulator originally suggested the cap in July but put it out to consultation to ensure it was fair.
Citizens Advice Scotland (CAS) has welcomed the confirmation but says more still needs to be done.
Today’s announcement is one good step forward, but a lot more needs to be done – today’s announcement does not make payday loans safe overnight
It argues the 0.8% cap is still too high, but concedes it is a “start”.
CAS spokesman Fraser Sutherland said: “Today’s announcement is one good step forward, but a lot more needs to be done. We need to monitor the effect of this cap, and keep an open mind on whether it should be tightened in future.
“We also need to increase the number of fair lending options so that people who need to borrow money are not forced into using high-cost payday loans. Both the Scottish and UK governments have a role here.
“Meanwhile we would urge people to remain very cautious when borrowing money. Today’s announcement does not make payday loans safe overnight. If you are in financial difficulty, borrowing money is not the answer. Instead, you should get free financial advice from your CAB.”
The new cap means 7 % of current borrowers may no longer qualify for a payday loan according to the FCA, which took over regulation of consumer credit five months ago.
It argues those people are being protected as they are likely to have gotten into a worse financial situation if they were to be granted a loan.
Martin Wheatley, the FCA's chief executive officer, said: “I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.
“For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”
However warnings against the cap have already been made.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents short term lenders, said with fewer people getting loans more may turn to illegal lenders.
The price cap will be reviewed in 2017.
|New price cap structure as of 2 January, 2015|
|Initial cost cap of 0.8% per day – 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 – 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% – Borrowers must never have to pay back more in fees and interest than the amount borrowed.|