Will Payday Loan Interest Rates be capped?

The various marketing campaigns of payday lenders make it very hard to avoid their presence in the unsecured loan market. Yet it’s not just the constant TV commercials, radio and online advertisements that have pushed this loan product into the spotlight.

You can rarely read a tabloid newspaper without seeing stories of individuals that have been caught up in a spiral of payday loan debt. However, the latest story regarding payday loans surrounds their interest rates and a potential cap that could be put on them.

This constant negative press prompted the Office of Fair Trading (OFT) to begin investigations on a number of lenders. Following their sweep of over 50 short term loan providers, they concluded that while the vast majority are abiding by their guidelines.


However, the problem lies with the interest rates and the affect they have on the total repayment figure if the borrower misses the payment. As a result of this the OFT proposed that these sky-high rates needed to be capped.

On receiving this proposal, the House of Lords accepted, meaning the new laws are currently being passed by Parliament. This has left many asking the question, will the interest rates of payday loans be capped? If so, what will they be capped to?

Currently there is no word on the figure that they will be capped to, but many experts predict that this cap will happen. Currently there are some payday loan providers charging their short term loans at rates of as high as 16,000%, it is almost certain that these providers will be forced to lower their rates considerably or face closure.

There are a number of payday lenders who are worried about this law as it could see their profits fall dramatically or even see them go out of business. The reason for this is; on the average payday loan, due to the administration fees and other costs involved; many lenders actually make a loss.

Often, payday lenders make their money when the borrower is unable to pay on the scheduled date and the loan account rolls over.

This is the exact reason many firms were warned by the OFT as they were deemed to be ‘encouraging’ customers to allow their loan to roll over. This is also the reason that this loan product came under intense scrutiny, as many felt they were lending without any proof that the borrower could afford the repayment.

When searching finance related forums you will come across a number of people who feel rates should be capped to below 100% APR, to me this figure seems way to low and essentially unrealistic. If this was to become reality however, we would see the payday loan industry go into meltdown as there simply would be enough money in the industry to keep payday lenders alive.

This article has been written by Jason Scott. To learn more about payday loans or anything finance related, visit https://www.guarantorloansonline.co.uk/Blog. He recently wrote an article titled Christmas Guarantor Loans – Check it out!