This guide relates to the changes the FCA made in April, 2014. For a guide to the changes of January, 2015, please see our guide, FCA Payday Loan Caps: Your FAQs Answered.
On 1st April, 2014, the FCA (Financial Conduct Authority) will take over regulation of the consumer credit market from the OFT (Office of Fair Trading).
One of the first things the FCA will do is crack down on lenders that offer 'High Cost Short Term Credit' (HCSTC), and this includes payday loans.
They're imposing new regulations that satisfy two main aims;
- "to ensure that firms only lend to borrowers who can afford it"
- "to increase borrowers' awareness of the costs and risks of borrowing unaffordably and ways to get help if they have financial difficulties"
So, what are the FCA changing?
The key changes include:
Limiting the number of times a loan can be rolled over
Currently if you can't afford to repay your payday loan on time you can usually roll it over to the next month. This flexibility comes as a cost and can quickly lead to a small short term loan turning into a hefty loan term debt.
Usually the balance of your loan is extended by a month, with extra interest and roll over fees whacked on to your borrowing. You generally only have to pay the interest charges upfront when you roll over a loan - but sometimes this can be rolled over as well.
Under the new FCA rules you will only be able to roll over your loan twice before the balance will be due. This protects you from spiralling debts, while still maintaining some flexibility should you need to extend a loan due to exceptional circumstances. Notably the FCA have chosen to go further than the voluntary Good Practice Charter introduced in 2012, which sets a limit of roll overs to 3.
Remember; it's only worth looking at payday loans as very short term borrowing solution if you don't have any other options, and it's always a good idea to repay it in full when it's first due.
Stopping lenders from trying to collect payment more than twice
Most payday lenders will use a CPA (Continuous Payment Authority) to collect payment. This is a way of taking money from your bank account that gives the lender the right to take payment on any date they like, and any amount they like. This is important because although lenders should let you know when they plan to take payment and how much it'll be, not all do.
Used CPAs can be a quick and flexible way to pay your bills as they help you avoid default and late payment charges if the lender tries to collect payment from your account and the money isn't there. However, there is growing concern that they are open to misuse, leading to payday lenders taking money from their customers' accounts without warning.
This causes problems if money is taken ahead of other bills, causing defaults on more important debts like your council tax, utilities, mortgage or rent; and leading to bank charges and future credit issues.
Under the new FCA rules, lenders will be limited to only two failed CPA attempts. This means that they can't continually try to withdraw money from your account when you don't have the funds available, and instead will need to contact you to find out what's going on.
This limit can be reset if you decide to refinance or roll over your loan and pay the amount you currently owe.
Banning part payments by CPA
As well as introducing a limit on the number of times lenders can try to collect payment via CPA, they'll also be limited to how much they're able to collect.
From 1st April, payday lenders will only be able to take payment via CPA if you have enough money in your account to cover the full amount you owe them; they're no longer able to take part payment.
This will give you greater control because it will mean they can't empty your account if you haven't got enough money to repay them in full.
What's more, if they find you have insufficient funds in your account they'll still only be able to try to take payment twice.
You will still be able to make one-off lesser payments to reduce your debt, but your will need to give consent for a different amount to be taken from your bank account.
Introducing a new risk warning
All payday companies will have to clearly display a new risk warning which is:
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
This must be displayed on all "electronic communications" from 1st April, 2014 and within "non-electronic media" from 1st July, 2014.
Forcing lenders to give you information about debt help
Payday lenders will now have to provide you with information about how to get free debt advice before you refinance or roll-over a loan.
The information sheet will be published on the FCA website on 1st April and won't include any fee-charging debt advice providers.
Notably the information sheet doesn't need to be given out when you first take out a loan - only if you roll it over, or refinance.
What about the proposed payday loan price cap?
In November 2013, the coalition Government announced plans to introduce a cap on short term credit costs - this has now been passed in The Banking Reform Act 2013.
Full details of the price cap are yet to be finalised by the FCA, but it must be in force by 2nd January, 2015 so further details are likely soon.
Will this make payday loans better?
These changes should help protect you from unscrupulous payday lenders and make it more difficult to get into a spiral of debt with one sole payday lender.
What it won't do is make payday loans any cheaper - they will still be one of the most expensive ways to borrow money.
So are there any cheaper options?
Yes, there are several alternatives that will be a much cheaper option for most people.
Using an existing credit card to make a payment can be interest free if you repay in full when you get your statement. Even if you can't pay the balance in full they will be cheaper than most payday loans.
Other alternatives include using an authorised overdraft or borrowing from friends or family read our guide: The Cheapest Way to Borrow Money Fast for more help finding a cheaper solution to payday loans.
Borrowing more may not be the answer
Applying for a payday loan is only worth considering in very specific circumstances, namely you need to borrow for a short period of time and don't have any other options.
If you find that you're looking for a payday loan more routinely, or borrowing to pay off other debts then you need to stop and take a hard look at you're your finances. Speak with your existing lenders rather than borrowing more to cover your repayments, they should try and help you find a way to make your loans more affordable.
Thankfully there is lots of free help and advice available if you feel like you are starting to struggle with your borrowing. Our guide; to dealing with debt looks at where you can turn for help, or you can compare the different debt charities from those listed in our comparison.