What are the FCA rules on high-cost short-term credit (payday loans)?

Full answer

High-cost short-term credit rules were introduced by the Financial Conduct Authority specifically to address widespread concerns about payday lending, where borrowers could previously face spiralling debt from very high daily interest rates and repeated rollover fees. **What counts as high-cost short-term credit** The FCA's definition broadly covers short-term, unsecured, high-cost loans, most commonly payday loans, though it can also capture certain other short-term credit products meeting the specific regulatory definition, generally excluding longer-term loans, mortgages, credit cards, or authorised overdrafts, which are subject to different regulatory regimes. **The daily interest and fee cap** Lenders offering high-cost short-term credit cannot charge more than 0.8% of the amount borrowed per day in interest and fees combined -- this cap applies for every day the loan remains outstanding, whether the loan runs for its original agreed term or is extended. **The default fee cap** If a borrower defaults on a high-cost short-term credit agreement, the lender cannot charge more than £15 in default fees, regardless of the size of the loan or how many payments are missed, preventing the kind of escalating default charges that could previously significantly increase a borrower's total debt. **The total cost cap -- the '100% rule'** Perhaps the most significant protection is the total cost cap, which means that no borrower can ever be required to pay back more in total interest and fees than the original amount they borrowed, regardless of how long the loan remains outstanding or how many times it is extended or rolled over -- for example, borrowing £200 means the absolute maximum you could ever be charged in interest and fees combined is £200, meaning the most you could ever repay in total is £400. **Why these rules were introduced** Before these caps were introduced, some payday lenders charged extremely high effective annual interest rates, and borrowers who rolled over loans repeatedly (extending the term when they could not repay on time) could see their total debt spiral to many multiples of the original amount borrowed, sometimes running into thousands of pounds from an initial loan of just a few hundred pounds -- the FCA's rules directly address this specific harm. **What has happened to the payday lending market since** The combination of these caps and other stricter FCA lending rules (such as more rigorous affordability checks) significantly reduced the size of the UK payday lending market, with a number of previously large payday lenders exiting the market or ceasing to trade entirely following the introduction of these rules, as the previous, more permissive charging structure that had underpinned much of their business became unviable. **Worked example** Someone borrows £300 through a payday loan for 30 days. Under the 0.8% daily cap, the maximum interest and fees chargeable for those 30 days would be capped accordingly, and even if they were unable to repay on time and incurred a default fee (capped at £15) plus further ongoing daily interest, the total cost cap ensures they could never be required to pay back more than £600 in total (£300 principal plus a maximum of £300 in combined interest, fees, and default charges), no matter how long the situation continued or how it was extended. **Practical tip** If you are considering a payday loan or short-term credit, check that the lender is FCA-authorised and confirm the total cost cap applies -- and consider whether cheaper alternatives, such as a credit union loan, an arranged overdraft, or negotiating directly with whoever you owe money to, might be available before taking on high-cost short-term credit.

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