People using payday lenders are to see the cost of borrowing fall significantly under a crackdown announced by the financial regulator today, but critics have warned that it will mean "no real change".
The Financial Conduct Authority's proposals for a cap on payday lending mean that from January interest and fees on new loans, including those rolled over, must not exceed 0.8% per day of the amount borrowed.
The watchdog said that those who borrow £100 for 30 days and pay back on time will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20.
However, Labour MP Stella Creasy, a prominent payday loans campaigner, wrote on Twitter that the price cap looked "worrying" as the level it was set meant it would be "business as usual for legal loan sharks".
“@paullewismoney: FCA price cap APR 28 days 1284.1%, 21 days 1375.7%, 14 days 1480.2%” < so no real change as similar to current rates..— stellacreasy (@stellacreasy) July 15, 2014
Under the proposals, fees for borrowers who cannot repay their loans on time must not exceed £15 and they must never have to pay back more in fees and interest than the amount borrowed.
It means that someone struggling with repayments on a £100 loan will never pay back more than £200 in any circumstance.
The FCA estimates that consumers will save on average £193 per year through the measures, translating into £250 million annual savings overall. The price cap is set to cost the industry about £420 million in lost revenues.
FCA chief executive Martin Wheatley said: "There have been many strong and competing views to take into account, but I am confident we have found the right balance.
"Alongside our other new rules for payday firms - affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers."
Last year, 1.6 million consumers took out 10 million loans, with a total value of £2.5 billion. The average loan has a principal of around £260 lent over an initial duration of 30 days. The average number of payday loans taken out by a customer last year was six.