FCA announces one-month freeze for payday loans

The FCA has unveiled another package of measures to support consumers in financial difficulty as a result of coronavirus, including a one-month interest-free payment freeze to customers facing high interest rates on payday loans.

The regulator suggested this shorter period will reflect both the much shorter length of most loans, and that given interest rates tend to be higher than for other high-cost credit products, should prevent high-cost short-term credit firms from accruing additional interest during the freeze period.

After the end of the freeze, the FCA suggested firms should allow the consumer to pay the deferred payment in an affordable way – which could be in a number of smaller instalments – and the regulator also reminded payday lenders to consider whether “immediate formal forbearance” may be more suitable, if a customer was already in financial difficulty before the impact of Covid-19.

FCA interim chief executive, Christopher Woolard, said: “We are very aware of the continued struggle people are facing as a result of the pandemic. These measures build on the interventions we announced last week, and will provide much needed relief to consumers during these difficult times.

“We have tailored our measures to specific products. For most of these proposals, firms and consumers should consider the amount of interest which may build up, and balance this against the need for immediate temporary support. If a payment freeze isn’t in the customer’s interests, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan.”

Hargreaves Lansdown personal finance analyst, Sarah Coles, described the wait for any news on payday loans as “agonising”.

“Unfortunately, the FCA has struggled to solve the problem of payday loans,” she commented. “It’s caught between a rock and a hard place. If it forced a three month payment freeze and let interest build up, the bills would be impossibly huge.

“Meanwhile, if it forced a three-month interest-free payment freeze, it could put these companies out of business and people would end up at the mercy of informal and unregulated forms of debt.

“The compromise of an interest-free payment freeze for just one month will offer a little breathing space and is far better than nothing, but for many people it won’t be nearly enough to help them make ends meet. The FCA has made it clear that if these steps aren’t enough, companies should offer more help. This could include spreading smaller payments over longer periods without a hefty interest penalty.”

The range of the FCA’s latest proposals also covered other high cost credit agreements, including buy-now pay-later, rent-to-own and pawnbroking, as well as temporary measures to provide motor finance support.

The regulator said it was expecting to finalise the proposals by Friday 24 April before they come into force shortly afterwards.

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