Capping interest rates on high-cost loans may do more harm than good
www.guardian.co.uk/money/blog/2010/aug/26/capping-interest-rates-unsecured-credit
The public supports a rate cap, but it would be a simplistic measure to a complex problem. We all know that the poor pay more for everything but the unresolved question is – what do we do about it?
This week's YouGov omnibus survey for Compass appeared to find overwhelming public support for a cap on interest rates as a solution: 68% of respondents believe there should be a lending rate cap to cover all forms of consumer credit, including the unsecured credit sector.
I can see how this seems like a sensible way of helping prevent people who are seeking short-term credit for small loans from being exploited, particularly those seeking loans from home credit and payday lenders. After all, some payday lenders from America charge over 2500% APR. However, these sky-high APRs exaggerate the true cost of this type of credit.
Interest rates reflect more than the cost of money. Last year's report by the Joseph Rowntree Foundation into the feasibility of a not-for-profit home credit business found that, even on a not-for-profit basis, to make the service financially sustainable the percentage cost of home credit would be over 100%.
The Office of Fair Trading has recently reviewed the high-cost credit sector. Its report will form part of the government's review which includes the coalition promise to consider regulating the cost of some forms of credit. The OFT found that introducing price controls would not be an appropriate solution – it could lead to higher costs for consumers and the exit of some providers from the sector.
Interest rate caps can harm people seeking this type of credit more than they help them. If they cannot get credit when they need it, the more likely they are to borrow from unregulated, illegal loan sharks. This might be an old argument, but just because it has been said before does not mean it is not still relevant.
Therefore, it is important that government measures should not make it harder for the less well-off to have access to a sector that a recent review by the OFT found works reasonably well.
The review found that home credit lenders appeared to treat their customers well, as there were low levels of complaints from consumers. More importantly, it found that they tended to show forbearance with repayment difficulties. This is key for me. Of all the lenders the Consumer Credit Counselling Service sees, the home credit sector has frequently proved to be the most forbearing. Agents visiting the homes of clients can easily recognise the can't pays from the won't pays, and those that can't pay don't, while the debt doesn't spiral out of control with punitive interest rates and penalties.
The OFT found that suppliers of this type of credit fill a gap in the marketplace not fully served by mainstream providers. That is really the crux of the issue. Not only are most people who use this type of credit less well-off, they often find it hard to access credit from the mainstream banking system.
This can be for various reasons as the review found, many of which arise from more deep-seated issues, such as weaknesses in the financial capability of consumers without credit history, and the reluctance of big banks to be associated with high-cost lending.
To solve the problem we need new approaches: rethought attitudes to small-scale lending from the big banks, a separation of the cost of money from the cost of delivery in the APR so the price of service and convenience stands out clearly, and better information about paying habits as opposed to traditional creditworthiness. The Registry Trust, which I also chair, is exploring setting up a payment register as a way of establishing a file for those with little credit history.
In addition, the government could spread knowledge by extending the website www.lenderscompared.org.uk (set up after the Competition Commission looked at high-cost credit) to make choices clearer to consumers.
Payday lenders need different treatment from the established home credit sector. There is merit in the Consumer Focus recommendations to limit the number of payday loans taken out or rolled over, to five per household annually, for payday lenders to share information to avoid people borrowing from multiple lenders simultaneously and to develop an industry code of practice.
The issue of high-cost credit is a complex one. Capping interest rates could do more harm than good.
• Malcolm Hurlston is chairman of the Consumer Credit Counselling Service, a charity that provides help and advice to people with debt problems
Related
-----
www.bbc.co.uk/news/uk-11050340
21 August 2010 Last updated at 23:02 GMT
Public 'want government to cap credit interest rates'
Compass says plans to restrict credit and store card interest rates do not go far enough
Nearly seven people in 10 want the government to impose a cap on the interest rates that can be charged by credit companies, a poll suggests.
Plans already exist to ban excessive rates on credit and store cards.
But campaign group Compass claims its survey of 2,095 people shows the public want tighter controls on all forms of credit, including pawnbroking and so-called payday loans.
It says the unsecured credit sector "causes misery for thousands".
Research published earlier this month by Consumer Focus suggests 1.2 million people are now taking out short-term payday loans every year, borrowing a total of £1.2bn.
Such loans can provide a quick and efficient way of getting hold of credit, but some providers have been criticised for charging interest rates of more than 2,500% a year.
'Fairer society'
Compass says some credit arrangements amount to "legal loan sharking" and its survey, conducted by YouGov, found that 68% of people felt it was up to the government to protect consumers.
Of those polled, 69% also agreed that the government should do more to support sources of affordable credit such as a post bank and credit unions.
Gavin Hayes, general secretary of Compass, said: "These findings show that the government's plans for credit reform don't go far enough.
"The public feel that just capping excessive credit and store card rates falls short. They want caps on the cost of credit to cover the whole of the unsecured credit sector that causes so much misery for thousands of people in the UK that can least afford it.
"This is a key test of the coalition government's stated commitment to create a fairer society. Now we need to see if it backs the people or the financiers."
Compass is part of a coalition of pressure groups, MPs and others signed up to the End Legal Loan Sharking campaign, which aims to lobby Prime Minister David Cameron to take action on the issue. |
