Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

Is the Cap Rate for UK Loans Fair?

Right now, short term loans in the UK have a cap rate of 24%, but what does that mean? What are the other relevant caps? Are they fair? How does it affect an individual seeking a personal loan in the UK? Let’s break down the UK cap rate in a few easy steps. First off…

What is a cap rate?

A cap rate is the maximum rate a lender can charge an individual for a loan if they repay on time. It is set by a government’s financial regulatory body, which in the UK is the Financial Conduct Authority (FCA). Here is an example: if the cap rate is 24% and an individual takes out a £100 loan for 30 days and then repays it on time, the lender cannot charge the individual any more than £24 for giving them that loan.

What is the cap rate in the UK?

Since January 2nd, 2015 the cap rate for personal and payday loans in the UK is 24% with a flat £15 cap on late fees. Though interest can still be charged after the due date (capped at 0.8% per day plus late fees), the final cost of a loan is cannot exceed 200% of the loan itself. That means that if an individual takes out a loan of £100 and cannot repay it in time, the loan will continue to accumulate interest and they will repay a maximum of £200.

Are loans in the UK fair?

This is a tricky question. For someone who has taken out a loan and is extremely late in paying it back, it’s easy to complain about having to pay extra for a tardy loan. But trying to look at the situation objectively paints a different picture. For starters, while to a payday loan customer it may seem trivial at first glance, there’s a lot that goes on behind the scenes at any lender in the UK. Any business needs to pay their employees, giving out loans in the UK is no different. There are also all the other costs of running a business, like property rental or website development and upkeep. On top of that, UK lenders must make sure they follow all of the specific rules and regulations that come along with running a lending business in the UK. This take a lot of time and energy from the owners and employees, as well as money.

Lastly, if a loan is late a lender has to resort to debt collectors, which is a hefty cost to them directly and has to fall under the 200% final cost cap, further reducing the profit of the lender. Within the cap rate, getting an extremely tardy lender to pay their loan can end up making almost no money at all for a lender. While a 24% cap rate and 200% final cost cap may seem high for something like a personal loan in the UK, remember that it doesn’t represent pure profit for the lender – far from it.

I thought payday lenders make pure profit!

Here’s a good way to think about it: any time you buy something from a pound shop the item you pay for probably cost under £0.10 to make. By spending £1 for it, you’re paying more than 1000% interest on it! But the final cost to the consumer isn’t just the cost of production. It includes the design of the item, its manufacturing, shipping costs from a manufacturing plant around the world, and all the cost of paying the people that helped get it there and sell it to you.

At the end of the day, the pound shops owner doesn’t see anywhere near 1000% profit on the item sold to you, even if it barely cost anything to produce. Payday loans are no different, it’s easy to think “I got £100 but had to pay 24% interest, what a rip off!” but that 24% is not just profit for the lender. In fact, the industry average profits are no different than any other industry in the UK.

Moral of the story: the FCA enforces a cap rate to protect the consumer, but it has to make sense for businesses too. Overall, the current cap rate is fair – and it’s actually been brought down from the rates in the past. Having said that, Fernovo, using its unique business model and the Novoquote decision engine, even managed to take this reasonable rate and reduce it by 40%- yes 40% – below cap rate so if you borrow £300 for 3 months from Fernovo and the same £300 from our leading competitor, you will pay £65 less with Fernovo!!

Fernovo: smarter, faster, fairer loans


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