The new cap on the total cost of credit is an important step towards protecting consumers from the debt trap of excessive interest rates and charges, says Citizens Advice.
The Financial Conduct Authority, which regulates payday lenders, has announced a 100 per cent cap on the cost of credit, meaning that from January no borrower will have to pay back more than double their original loan.
New research from Citizens Advice reveals the payday loan hotspots across England and Wales.
In depth analysis of a sample of 30,000 serious debt clients, 3,500 of whom had payday loans, finds:
- North East and West Midlands are payday loan hotspots
- The top three areas for clients with payday loans are in the North East: Northumberland has 107 cases, County Durham has 84 cases and Newcastle upon Tyne has 83 cases
- People in South Tyneside have the highest average payday loan debt at £1,122
- People in Newcastle upon Tyne have more payday loans per person than anywhere else in the country.
Gillian Guy, Chief Executive of national charity Citizens Advice, said: “This cap means payday lenders can no longer force borrowers into an endless spiral of debt. This is a real improvement. People have sought help from Citizens Advice after their payday loan of £300 ballooned to over £2,500 worth of debt. The cap will help to stop these serious cases in which sky high interest and extortionate fees turn a small loan into an unmanageable debt.
“This is a step towards fixing a market that hasn’t been working for consumers. Payday loan firms should only lend to people who they know can afford to pay back the debt, and must point those who can’t towards free debt advice.
“People who are in a position to borrow need a responsible short-term credit market. A vital part of this is greater choice. High street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.
“The FCA should monitor the cap, including whether it is set at the right level, to make sure it is working for consumers. They must also keep a close eye on whether lenders are sticking to the rules. Problems with high cost credit go well beyond payday loans. We’re concerned about the serious problems people are reporting with products like logbook and guarantor loans. As the new rules force payday lenders to treat customers more fairly, these other areas must be given more attention.”