Payday loans: FCA could cap interest rates

In fact, the question of payday loans and how much they charge has gone as far as the House of Lords. The Government accepted a change to the Financial Services Bill after the Lords supported an amendment to give powers to the Financial Conduct Authority: the FCA will be able to cap interest rates if it is felt lenders weren't giving customers a fair deal.

Labour peer Lord Mitchell and Justin Welby (the incoming Archbishop of Canterbury) feel that the Government's Financial Services Bill didn't go far enough to protect payday loan borrowers from high interest charges.

"Payday loans have come under criticism for the high APRs that many lenders charge - often in the thousands," said a spokesperson for Gregory Pennington. "At the same time, it's acknowledged that some people find a payday loan a handy way to get a 'cash boost' before the end of the month, to help them cover the cost of an unavoidable bill or other expense.

"A 2010 report by the Office of Fair Trading, for instance, found that 'these markets work reasonably well' in a number of respects - for one thing, they serve people who can't access credit from mainstream lenders."

How does a payday loan work?

However, while payday loans can be affordable if paid back quickly, problems can quickly start if people don't pay them back on time. Interest and further charges can be added, which can push the cost up beyond anything they expected.

In some cases, it's possible to 'roll over' a loan a number of times - but again, the more a loan is rolled over, the larger the debt will grow. Some people decide to take out further loans to help them repay existing ones, which can lead to the problem getting worse.

So charities, debt advice bodies and other organisations have been quick to welcome the idea of an interest cap on payday loans.