A CAP on the fees and interest charged by payday lending firms is to be introduced in a bid to protect borrowers from escalating debts.
The proposals, which include default fees capped at £15 and a limit of 0.8 per cent each day on interest on unpaid balances, should mean those who cannot repay on time will never have to pay back more in charges than the amount borrowed.
The latest clampdown on the industry by the Financial Conduct Authority is due to come into force in January, subject to a consultation period.
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The watchdog is also planning a price cap on new loans — including those rolled over — under which interest and charges must not top 0.8 per cent a day of the amount borrowed.
That means 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.
The FCA estimates that consumers will save on average £193 a year through the measures, translating into £250 million in annual savings overall. The price cap is set to cost the industry about £420m in lost revenues. The moves have been welcomed by consumer groups, although the industry is concerned that the crackdown will limit choice for borrowers, who will be forced to turn to loan sharks or lenders operating outside the UK.
Charity StepChange recently said it received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
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."
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 loaned over an initial duration of 30 days.
Payday lenders are already prevented from rolling over loans more than twice and have been restricted in their ability to drain money from bank accounts.