The Sharks Are Circling...

The Financial Conduct Authority (FCA) has announced that with effect from January 2015, Payday loan rates will be capped at 0.8% per day of the amount borrowed. The price cap plan includes both interest and fees, so in total no one will have to pay back more than twice what they borrowed, and there will be a £15 cap on default charge.

What protection will this provide for prospective borrowers? Basically, if for whatever reason a borrower defaults on these loans, the interest on the debt will build up, but he or she will never have to pay back more than twice the amount they borrowed. This will be welcome news for those in Northern Ireland who face future austerity measures as our economy lags behind the rest of the UK.

FCA's Chief Executive Martin Wheatley has claimed that it "may be the case" there will be no High Street Payday lenders in a year's time and for people who struggle to repay, we believe the new rules will put an end to spiraling payday debts." As the regulators have taken action, the FCA has said it is likely that more than 90% of the sector will close down.

There has been big demand for the Payday loan industry which currently represents approximately £2.8bn of debt. Indeed, many borrowers are able to manage short term credit; for example, to use them as an alternative to expensive bank overdrafts. The problem is that the Payday loan industry really "make their money" lending to people who cannot afford it.

As such, controls on payday loan companies will be welcomed by many but it is also worth considering the unintended consequences. Despite FCA disagreement, it could make hard-pressed, vulnerable people easy prey for the unregulated loan sharks.

Debt is an affordability issue and we meet borrowers struggling with their debt every day. With uncertainty in the local Northern Ireland economy and increased austerity measures, the screw is being slowly tightened on household budgets.

Businesses and people will always need to borrow money, but it must be conducted responsibly and in such a way that it is affordable and reasonable. Demand for money, especially now on the run-up to Christmas, can lead in one very unpleasant direction for borrowers who might be desperate, into the mouth of the loan shark.