Monday, 25 November 2013

Where will a cap on payday lenders be set?

Look at Wonga's website and you'll see  it admits to an APR on its short terms loans of 5843%.

Wonga's line is that this rate is unfair because it assumes customers borrow for a year -- which it says they don't -- and it includes lots of extra charges.

It says its interest rate is actually 365% a year.

But how would that compare to a possible cap on the cost of credit in the UK?

France, Germany, Japan and Poland all have caps of around 20%, even less in Germany's case.

Florida has an 11% upper limit.

These rates would surely represent a huge challenge for the likes of Wonga.

In his comments today, the Chancellor referred to Australia as an instructive example, so we should take particular notice of that.

Australia has a 20% cap on up front charges and a 4% cap on monthly interest.

My calculator tells me that 4% a month is the equivalent of 60% a year. A lot, but still well below the Wonga rate.

However, Australian payday lenders are also allowed to charge 200% of the loan in default charges, if the customer has trouble paying back, plus additional debt recovery costs.

So the total bill for the borrower can still escalate.

It is being left to our watchdog, the FCA, to decide an appropriate upper limit for the total cost of credit.

Its worries are:

*set the cap too high and some lenders will actually raise their charges

*set it too low and some might leave the market, pushing desperate customers to illegal loan sharks

Where will it end up: somewhere in the middle? Will the FCA sanction charges which could still add up to hundreds of per cent?

The watchdog is unlikely to want to be seen as a soft touch -- so expect some frantic lobbying from the lenders.

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