Credit where it’s due: City watchdog is right to restrict payday lenders

It’s better late than never to introduce new rules to control the excesses of payday lenders. From January they will be forced to limit the amount they charge. That will have two major ramifications. Crucially it will help avoid more people being pushed into a disastrous debt spiral through the actions of predatory lenders that prey on vulnerable people.

But it will also force some firms out of business. Estimates suggest that just four or five will be able to thrive under the new restrictions when there have been hundreds operating in the market. That tells its own tale. There is a place for short-term, high-cost credit. For those that can afford it and understand the costs, it can be a convenient way to survive a minor cash crisis.

But that’s very few of the estimated one million people that have turned to payday loans in the past few years. They’ve been attracted by the brash marketing – often involving puppets and cartoons – that has led with the “instant cash” message. Lenders have already been forced to put a brake on irresponsible advertising and many ads have been banned for encouraging frivolous spending. The payday lenders still operating in 2015 will have to make it clear to borrowers the cost of loans.

Critics say the limit has been set too high. At 100 per cent of the loan – or twice what was borrowed – it means payday loans will remain one of the most expensive ways to borrow. But the City watchdog has suggested that if the limit was set any lower, all payday lenders would be forced out of business.

We don’t want that. We want a responsible and accountable high-cost credit sector. The new limits and previous restrictions will put us a long way towards achieving that. But we also need more done to publicise the alternatives to high-cost, short-term credit. That means greater investment and support for the nation’s credit unions. But the Government should also do more in the form of tax relief to encourage companies to promote workplace loans.