The authorities in Britain have moved to prevent so-called payday lenders abusing the people who borrow money from them.
The companies – which lend small sums for a short period of time – will have the amount of interest they can charge capped.
It is a response to firm’s charging annual interest rates of up to nearly 6,000 percent, sometimes pushed borrowers into a spiral of debt.
Bob Parker, a Senior Adviser in the Investment, Strategy and Research Group with Credit Suisse, welcomed the changes: “It is definitely a good thing and I think one area which the Financial Conduct Authority in the UK has looked at, and is quite right to look at is the very aggressive selling tactics of some of the pay day lenders and also their extremely high interest rates.”
The new rules, which come into force from January, mean nobody will have to pay back more than twice what they borrowed and they will not be hit with big default fees if they don’t repay what was borrowed.
Some of the loan companies are expected to go out of business with a fall in the profits they made from exorbitant fees and interest on loans that were supposed to just be until the next payday but often lasted much longer causing misery for borrowers.
Fears have been voiced that this could push people in need to turn to illegal lenders, so-called loan sharks, who charge even higher rates of interest, and use violence if they don’t get their money back.
But Martin Wheately, who heads the Financial Conduct Authority, dismissed that idea: “In practice, very few people say they would actually use a loan shark. So when we asked people, they’re aware of them and know the risks of them, the vast majority said they wouldn’t touch them.”