Payday loan charges cap: What you need to know

Video: The Independent's Personal Finance Editor, Simon Read, outlines the key points about the new regulation

(Dan Kitwood | Getty Images)

The headaches caused by payday lenders could begin to diminish today as new regulations come into force.

Customers of payday loans will now see the fees and interest they pay capped to ensure spiralling debt levels are curbed.

Payday loans are now capped at 0.8 percent per day of the amount borrowed, while a customer will never be charged more than twice the amount they have borrowed.

That may still sound costly and that's because it is.

As Simon Read explains, payday lending is practically the most expensive way to borrow, but unscrupulous lenders have persuaded lots of people to take short-term loans by focusing on the convenience - and not mentioning the high cost.

Those that have fallen prey to such tactics can quickly find themselves in a spiral of debt if they don’t repay the loan within days.

The Financial Conduct Authority (FCA) said today's move will lower costs for borrowers and ensure charges are proportionate.

For example, if someone borrows £100 for 30 days and pays back on time, they will not be charged more than £24.

Furthermore, someone who borrows £100 but struggles to repay their debt will never pay back more than £200.

Campaigners gathered outside Wonga's London offices today to make sure firms respect the new rules as well as calling on the government to set up a new community finance fund, paid for by fines on banks and payday lenders.