The author of a major study that prompted the introduction of a cap on the cost of payday loans has warned lenders face 'annihilation' if they do not change their ways.
Dr John Gathergood, of The University of Nottingham, carried out the research that underpinned today’s landmark announcement by the Financial Conduct Authority.
From January next year payday lenders will be limited in what they can charge, with interest and charges capped at a maximum of 0.8% of the loan principal per day.
The policy is intended to put an end to the nightmare of small loans escalating into massive debts as under-pressure borrowers face ever-spiralling charges and default fees.
Dr Gathergood, a leading researcher in the field of household behaviour in financial markets in the School of Economics, said payday lenders had proved themselves “the villains of recession Britain”.
Predicting many would now go out of business, he said: “As the FCA has suggested, we may well see all High Street payday lenders shut down as a result of this policy.
“They have higher costs than online lenders, and the capped price is likely to be too low to keep them profitable. It’s therefore possible some well-known names will vanish.
“On top of that, all payday lenders will see their profits fall sharply. The cap is going to squeeze even the biggest landers, and many of them simply won’t be able to survive.
“The bottom line is that payday lenders have eight weeks from today to completely change the products they offer and figure out a new strategy for their business.
“These firms have grown used to being able to do whatever they want in this market, but now they have to obey the rules. In short, they have two months to adapt or die.”
Dr Gathergood said that the new policy would signal the end of "massive debt spirals”, adding: “The days of 5000% APRs are about to become a thing of the past.
“Payday lenders have been the villains of recession Britain, and now they have to accept that the government is serious about stopping them ripping off their customers.
“The FCA has offered them a chance to reform. They have to show they can provide products and services for the good of the customer – or else risk annihilation.”
Dr Gathergood said payday lenders had consistently exploited borrowers’ “lack of financial sophistication”, sometimes even through illegal attempts to enforce debts.
He said: “This sort of behaviour was allowed to go on for too long under a weak regulatory regime. The FCA now has stronger powers and hasn’t been afraid to act.
“The hope now must be that the payday loans market becomes the first rung on a ladder to better forms of credit rather than the last step on a descent into financial ruin.”
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