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Personal finance: Government announces new law on payday loans

The Government has announced new legislation to cap the amount of interest that payday loan companies can charge for short-term loans, reports the BBC.

Payday loan companies have been in the media spotlight for some time, with the Government threatening to legislate against them unless the industry was able to self-regulate to stamp out bad practice.

Payday loans are short-term finance deals readily available at short notice, allowing customers to borrow against their earnings to alleviate cash flow issues.

The popularity of payday loans has soared since the credit crunch, with more and more high-street lenders popping up to meet a voracious demand for short-term, easy finance.

The main issue with payday loans is the size of the interest payable against them. As short-term financial products lenders often charge annual interest in the thousands of percentage points, making the loans extremely expensive if they are not paid off on time.

The industry has previously been warned by the Government and the new finance industry regulator the Financial Conduct Authority that it needs to 'get its house in order'.

The Government has announced that the FCA will be allowed to impose a range of measures, including the ability to cap the level of interest that lenders can charge on payday loans.

The chancellor added that in addition to a cap on interest rates, the industry would face a range of new regulations to cap the overall cost of credit, and measures to limit lenders from attempting to withdraw money from a debtor's account more than twice.

The Government has been encouraged to act after studying the Australian system, in which lenders cannot charge more than 4% per month for short-term finance, and the maximum upfront fee is limited to 20% of the loan amount.

However, the Consumer Finance Association, which represents several of the main high-street payday loan companies, said that a cap on interest rates may not serve consumers' best interests.

"Research from other countries where a cap has been introduced, suggests price controls would lead to a reduction in access to credit, and open up a larger market for illegal lenders," they said in a statement.