People using payday lenders in the UK are to see the cost of borrowing fall significantly under a crackdown announced by the financial regulator today.
The UK's Financial Conduct Authority's proposals for a cap on payday lending mean that from January interest and fees on new loans, including those rolled over, must not exceed 0.8% per day of the amount borrowed.
The watchdog said that those who borrow £100 for 30 days and pay back on time will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20.
Under the proposals, fees for borrowers who cannot repay their loans on time must not exceed £15 and they must never have to pay back more in fees and interest than the amount borrowed.
It means that someone struggling with repayments on a £100 loan will never pay back more than £200 in any circumstance.
The FCA estimates that consumers will save on average £193 per year through the measures, translating into £250m annual savings overall. The price cap is set to cost the industry about £420m in lost revenues.
FCA chief executive Martin Wheatley said: "There have been many strong and competing views to take into account, but I am confident we have found the right balance.
"Alongside our other new rules for payday firms - affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers."
Last year, 1.6 million consumers took out 10 million loans, with a total value of £2.5bn. The average loan has a principal of around £260 lent over an initial duration of 30 days. The average number of payday loans taken out by a customer last year was six.
Payday lenders are already prevented from rolling over loans more than twice and have been restricted in their ability to drain money from bank accounts.
From July 1, firms operating in the industry have also had to place risk warnings on television adverts.
The £2.8bn sector has come under intense scrutiny amid outrage over the way that some consumers have been treated. Many of the problems found by regulators have revolved around people taking on payday debt they cannot afford, meaning the loan is then rolled over and the original cost balloons.
Charity StepChange received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
Russell Hamblin Boone, chief executive of the Consumer Finance Association, which represents the industry, said: "Anyone who thinks that a price cap is good news for borrowers should have a thought for those many people who will be turned down for loans because the best lenders will have to reject those with the worst credit records.
"We support a cap that allows the industry to operate profitably with the right protection in place for vulnerable people. With new regulations and tighter affordability checks, critics must now face up to the fact that most people use, need and like short-term credit and the measures in place are more stringent than for any other form of consumer credit."