The government has announced that the cost of payday loans will be capped under a new law. In a surprise move, Chancellor George Osborne said there would be controls on charges, including arrangement and penalty fees, as well as on interest rates. The Treasury has pointed to growing evidence in support of the move, including the effects of a cap already in place in Australia. Interest rates in Australia are capped at 4 per cent per month, after a maximum up-front fee of 20 per cent.
The level of the cap is yet to be decided but will be included in the Banking Reform Bill, which is currently going through Parliament. The level of the cap will be set by the FCA.
The CDFA welcomes the move to protect consumers from extortionate interest rate charges. The level of the cap will clearly be the crucial factor in the impact this has on CDFIs. As non-profit lenders they are keen to provide fair and affordable finance, but also have to cover their costs. They often provide advice and support as well as credit, which involves the time of skilled staff. For some this means interest rates of 100% need to be charged in order to be sustainable.