Britain's biggest payday loan company, Wonga, has signed up to a new code of practice being introduced on Wednesday that will restrict the number of times a loan can be extended.
High-cost short-term lending has been criticised for encouraging vulnerable people into debt that can quickly spiral out of control if not repaid on time. Some lenders have been accused of encouraging borrowers to "roll-over" loans month after month, each time adding fresh charges.
Anyone doing so will find that the charges can quickly add up to more than the amount borrowed in the first place. A typical loan from Wonga, for instance, has an annual percentage rate of 4,214 per cent. The online lender was yesterday quoting a charge of £42.96 for anyone seeking to borrow £100 for 36 days.
But under a revised lending code put together by the credit trade body the Finance & Leasing Association, the number of times a loan can be rolled over will be restricted to a maximum of three.
The FLA said it is making the change to give consumers new rights. But as Wonga is the only payday lender which is a member of the association, the move will spark calls for other finance trade bodies to agree similar restrictions.
If they don't, they may well be forced to. Both the Office of Fair Trading and the Department for Business, Innovation and Skills are currently reviewing the charges and practices of short-term lenders.
The revised FLA code – which will now run to 75 pages – also includes new rights for store card customers agreed with the Government in autumn 2011. They include a ban on sales commission and immediate customer discounts.