Consumer credit plays a vital role in the nation’s economy. This article explores the impact of price capping on HCSTC in the United Kingdom, offering insights and data on the changes.
In 2015, the UK’s financial regulator introduced a capping system to protect consumers from excessively high interest rates. Previously, High Cost Short Term Credit (HCSTC) operated under the Consumer Credit Act, regulated by the Office of Fair Trading rather than the Financial Conduct Authority (FCA). The new regulations also covered other lending forms, including rent-to-own, doorstep loans, store cards, overdrafts, and buy-now-pay-later offers.
Consumer credit provides flexibility in spending. However, it also carries the risk of unmanageable debt. When faced with financial strain, some borrowers resort to another loan as a temporary solution until payday, often falling into a cycle of debt.
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Norwich Trust
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10 years
4.8/5
Representative APR
31.90%
Minimum Age
21 Years
Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Loan Amount
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Loan Term
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Representative APR
31.90%
Minimum Age
21 Years
Minimum Income
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Evolution Money Loans
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28.96%
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Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00
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Evolution Money Loans
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Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00
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1Plus1 Guarantor Loans
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
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39.90%
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
High Cost Short Term Credit: A Brief Overview
The FCA defines High Cost Short Term Credit as an unsecured loan repayable within 12 months, with an Annual Percentage Rate (APR) of 100% or more. These loans fall into two categories:
- Payday Loans: Borrowers repay within a month.
- Short-term Instalment Loans: Repayment extends up to 12 months.
In December 2013, Parliament tasked the FCA with capping loan prices to protect consumers from unreasonable charges. On January 2, 2015, the regulator implemented a price cap. According to a 2019 FCA report, 760,000 borrowers saved approximately £150 million per year due to these changes.
Key Statistics
A 2019 FCA report examined borrower behavior following the price cap.
- 29.8% of loans are taken by tenants.
- 36.9% of payday loan borrowers are aged 25-34.
- The average loan value in Greater London is £284.
- Central and Greater London account for 15% of all loan originations.
- In Q2 2018, total loan value reached £338,179.
- Consumers borrow £1.3 billion annually, repaying over £2 billion.
- The North West region has the highest loans per capita (125 per 1,000 adults).
UK Geographical Area Analysis
Total Loans by Region (July 2017 – June 2018)
| AREA | NUMBER OF LOANS | % OF TOTAL |
| Central and Greater London | 796,202 | 15.0% |
| North West | 734,835 | 13.8% |
| South East | 641,315 | 12.1% |
| East of England | 484,780 | 9.1% |
| Yorkshire and The Humber | 458,486 | 8.6% |
| West Midlands | 457,896 | 8.6% |
| Scotland | 454,922 | 8.6% |
| South West | 375,752 | 7.1% |
| East Midlands | 331,321 | 6.2% |
| North East | 256,383 | 4.8% |
| Wales | 212,299 | 4.0% |
| Northern Ireland | 109,900 | 2.1% |
Reasons for Borrowing HCSTC
The FCA identified three types of borrowers based on their reasons for taking HCSTC:
- Survival Borrowers: Low-income individuals who borrow to cover essential expenses.
- Lifestyle Borrowers: Borrowers with steady income who take loans for large purchases.
- Reluctant Borrowers: Those who prefer bank loans but use HCSTC when other credit options are unavailable.
Financial Market Changes
To protect consumers, the FCA introduced a price cap that significantly altered the HCSTC market. Within five months, loans and amounts borrowed dropped by 35%. The number of payday loan borrowers also decreased by 800,000 over 18 months.
Price Cap Rules
- Initial Cost Cap: Interest and fees cannot exceed 0.8% per day of the loan amount.
- Default Fees Cap: Missed payment fees are capped at £15.
- Total Cost Cap: Borrowers will never pay more in interest and fees than the loan’s original amount.
Alternatives to HCSTC
Consumers often turn to HCSTC due to a lack of lower-cost credit options. However, alternatives exist:
Credit Unions
Credit unions offer lower-interest loans, with over 400 operating in the UK, lending £1.5 billion annually. They provide loans as low as £50 and charge a maximum APR of 42.6%.
Community Development Finance Institutions (CDFIs)
CDFIs are non-profits that support individuals and small businesses struggling to obtain credit. In 2017-18, they lent approximately £26 million to consumers.
Raising consumer awareness is key to reducing reliance on HCSTC. Borrowers should explore alternatives before opting for payday loans. The FCA continues to regulate lending practices to protect financially vulnerable individuals.
