UK
25/11/2013 02:42 GMT

Payday Lending Will Be Capped, Says The Government

The Government is to announce it will cap the cost of payday loans, after damning new statistics showed more than 60% are offered without proper checks on whether borrowers can afford to repay the loan.

The level of the new cap on the £2bn industry has not yet been fixed, and will determined by the new regulator, the Financial Conduct Authority (FCA). It will form part of the Banking Reform bill.

The Treasury says it believes there is "growing evidence" to support the move, citing the fact that Australia has an interest rate limit of 4% per month, after a maximum up-front fee of 20%.

wonga

Ed Miliband has previously criticised the 'Wonga Economy'

A Treasury spokesman said: "The Government has always kept the case for a cap under review as the market has evolved.

"The Government believes it is right to use the opportunity of this legislation for Parliament to be clear on its intention."

Labour have already pledged a cap, if they gain power in 2015, with Ed Miliband heavily criticising the "Wonga economy", and a ban on chirpy advertising for the loans.

The change comes as Citizens Advice warned that the troubled Universal Credit programme, set to be introduced in the spring could be a bonanza for payday lenders, as those on benefits struggle to cope with less regular payments - once a month, rather than fortnightly.

Four million people are likely to take out a payday loan in the next six months, the charity say.

More than 60% of the high-interest loans are offered without proper checks to assess whether borrowers can afford to repay, the charity said.

And a third of the people who go to a Citizens Advice Bureau about payday loans are unemployed, it warned, with three in four people saying they found it difficult to repay the loan.

The charity analysed 4,000 loans from more than 100 different lenders, who the charity claimed had broken 12 out of 14 pledges in an ethics charter launched in November last year.

In 84% of cases, lenders broke their promise to freeze interest and charges for those who contact them to say they are in trouble, Citizens Advice said.

"The changes brought in by Universal Credit will be a seismic shift for many people and I am concerned that payday lenders will see this as an opportunity to prey on those who struggle to adapt to the new system," Citizens Advice chief executive Gillian Guy said in a statement.

"The changes brought in by Universal Credit will be a seismic shift for many people and I am concerned that payday lenders will see this as an opportunity to prey on those who struggle to adapt to the new system.

"Lenders' appalling inability to assess whether loans are actually affordable means that people on benefits can easily get into serious debt as lenders unwisely hand over a loan.

"Universal Credit will be a shock to the system for many households as people move from weekly to monthly payments."

Ministers should also consider re-introducing fortnightly payments after 83% of Citizens Advice Bureaux clients in Universal Credit pilot areas said they will struggle, according to the charity.

A Department for Work and Pensions spokeswoman said: "Universal Credit will be paid monthly because most people in work are paid this way and it's right we make it as easy as possible for people on benefits to move into jobs.

"We know some people will need extra help with budgeting and we are ensuring this help is available. We've also invested £38 million in credit unions, so that claimants have a safe alternative to high interest lenders.

"Today Universal Credit rolls out to two more areas in Rugby and Inverness."