In a new turn of events the British Government are introducing new laws to allow restrictions to be enforced on payday loan interest rates.
The Government is to make amendments to the Financial Services Bill to give the new Financial Conduct Authority (FCA – the replacement for the FSA) new powers to limit the high charges imposed by payday loan firms.
Essentially the FCA will have the power to investigate individual loan schemes and actually impose a cap on the amount of APR charged. However, it will be interesting to see how much affect this actually has – especially since an APR is an inaccurate measurement for a payday loan, given that it should be paid off by the next pay-date – i.e. by the following month. APRs are measured over a 12+ month period.
But the move does make sense – when a customer see’s an APR as big as 4000% it does cause alarm bells… but maybe this is why APR shouldn’t be used by short term lenders as a means of measure. A better representative measure would be an average interest rate over the loan period – i.e. one month.
Commenting on the new bill, Lord Sassoon said:
“We need to ensure that the Financial Conduct Authority grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution.”
If this move makes payday lending fairer and more ethical, I for one am all for it.