The government is to change the law to allow a cap to be imposed on the interest rates charged for so-called "payday loans".

Ministers are to amend the Financial Services Bill to give the planned Financial Conduct Authority the power to limit charges.

The news follows concerns over annual interest rates of up to 4,000%.

The government faced a possible House of Lords defeat on an amendment put down by a Labour peer over the issue.

BBC political correspondent Norman Smith said it was being suggested that there should not be a blanket cap on interest rates but the Financial Conduct Authority (FCA) would be able to investigate different loan schemes and then set a limit on the amount of APR charged.

'Usury'
Labour peer Lord Mitchell put down the amendment to the bill, which was also signed by Lord Welby, the incoming Archbishop of Canterbury.

Lord Welby called the most costly loans "usury", saying that curbing them was a "moral" issue.

This followed concerns that loans intended to be short term have become prohibitively expensive and, in some cases, ruinous if not rapidly repaid.

The government has now agreed instead to introduce its own amendment to the bill next Wednesday.

The reason why it's so high is because the loan is short term. Typical loans are a few years long eg 1-5 yrs. These payday loans are meant to be stop-gaps for when you're caught short.

***NB: my maths is poor and my understanding of finance even worse***

If you borrow £100 for 30 days, do really expect to pay back just £100.50? (calculated using 7% apr)

Let's say the charge is £10. That means you pay back £110. If the interest for 30 days is £10, what's the APR? Something like 120%. That's vastly different from the 7% of a loan.

The reason why it's so high is because the loan is short term. Typical loans are a few years long eg 1-5 yrs. These payday loans are meant to be stop-gaps for when you're caught short.

***NB: my maths is poor and my understanding of finance even worse***

If you borrow £100 for 30 days, do really expect to pay back just £100.50? (calculated using 7% apr)

Let's say the charge is £10. That means you pay back £110. If the interest for 30 days is £10, what's the APR? Something like 120%. That's vastly different from the 7% of a loan.

In which case split the fee separately from the interest so rather than saying 1700% why not say £20 fee plus 50%?

Because the whole point of an APR is to show the total cost of the loan. Before APR's came in Banks etc could say 0% interest for a £2000 loan over 5 yrs - with an "arrangement fee of £1000" but the headline rate is 0% (with the fee hidden in the smallest print possible

It's pretty simple, cap the interest rate at something vaguely sane, say 15% and then if it's going to be a short term loan, charge a fixed arrangement fee.

It's pretty simple, cap the interest rate at something vaguely sane, say 15% and then if it's going to be a short term loan, charge a fixed arrangement fee.

I fully appreciate that but they should be at the same size not hidden in small print. APR is one way of comparing loans but why aren't banks told to display APR for overdraft charges on statements? So people can actually see how high that £1 overdraft actually turns out to be. If statements were printed to show in a decent size font that the APR was 400 000% they might kick up a fuss.

They do quote a "Typical APR" often based on an OD of £1000 - its hard to quote an APR on a none fixed amount