How the FCA payday price cap has reduced the cost of loans for UK borrowers

FCA price cap for HCSTC loans

In April 2014, the Financial Conduct Authority introduced a price cap for high-cost short-term credit loans, with the purpose of reducing the cost for borrowers and protecting those struggle to repay.

Here we explain exactly what those caps mean and show you how they work in the real world.

What products are affected by the price cap?

The measures apply to credit where:

  • the APR is 100% or more;
  • the credit is to be provided up to a maximum of 12 months.

The measures apply to payday loans and qualifying short-term loans.

How does the price cap work?

The price cap consists of three rules that lenders must adhere to:

1. Initial cost cap

An initial cost cap of 0.8% — The total cost of interest and fees must not exceed 0.8% per day (80p per £100 borrowed) which lowers the cost for most borrowers.

Example:

A £300 loan taken out over 30 days and repaid on time.

Interest: 3 (£100) x £0.80 x 30 days = £72 .

Total amount repayable: £372 – saving £18 **.

** Prior to the price cap, most lenders charged 1% per day, which made this loan at least £18 more expensive than today.

2. Fixed default fees

Fixed default fees capped at £15 — Default charges must not exceed £15 and interest on unpaid balances and default charges must not exceed the initial rate, which protects borrowers struggling to repay their loan on time.

Example:

A £300 loan initially taken out over 30 days but defaulted and repaid after 45 days in one lump sum,  where the lenders charges a default fee of £15 and an initial interest rate of 0.8% per day.

  1. Amount borrowed: £300.
  2. Interest: £72.
  3. Default fee: £15.
  4. Interest on unpaid balances: £36 (0.8% per day x 15 days).
  5. Total fees and interest on unpaid balances before cap: £51 (3 + 4)
  6. Total fees and interest on unpaid balances after cap: £36 (the maximum rate for 15 days).

Total amount repayable: £408 (1 + 2 + 6) – saving £15.

3. Total cost cap

Total cost cap of £100% — Borrowers must never have to pay back more in fees and interest than the amount originally borrowed, which protects them from escalating debts.

Example:

A £300 loan initially taken out over 30 days but defaulted and repaid after 180 days in one lump sum, where the lender does not charge a default fee but  has an initial interest rate of 0.8% per day.

  1. Amount borrowed: £300.
  2. Interest: £72
  3. Interest on unpaid balances: £360 (0.8% per day x 150 days).
  4. Total repayable amount before cap: £732 (1 + 2 + 3).

Total repayable after cap: £600 – saving £132  (limited to twice amount borrowed).

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