Three reasons why we need a cap on the cost of credit

Payday lenders have been called to a summit today to discuss the future of the industry, new regulation by the Financial Conduct Authority, and what should be done to make payday lending less exploitative.

Payday lenders have been called to a summit today to discuss the future of the industry, new regulation by the Financial Conduct Authority, and what should be done to make payday lending less exploitative.

The good news is this is necessary. We’ve recently seen extremely negative findings from the Office of Fair Trading’s investigation over payday lending, a damning report from consumer group Which? and a rise in complaints heard by the Financial Ombudsman Service.

The bad news is Jo Swinson MP, the consumer affairs minister, doesn’t want to talk about capping the total cost of credit lenders can charge.

She said it “could shut down short-term loans and force people towards illegal loan sharks or other extreme measures.”

Nonsense.

Here are three reasons we should have a cap on the total cost of credit:

It is good for consumers

While the payday lending industry has enjoyed unprecedented growth (worth £100m in 2004, now worth over £2bn in 2013) in recent times, credit access has become tougher for consumers. Around 1.75 million UK adults go without a basic bank account in the UK today and 9 million adults cannot access credit from mainstream banks.

This spells bad news for consumers as the only option for many is expensive short-term loans. Capping the costs of credit will make borrowing less expensive for consumers, at a time when wages are stagnant and the cost of living rises.

It is good for the economy

Damon Gibbons for the Centre for Responsible Credit, in a report on Japan and interest rate caps, noted that, all things considered, putting a ceiling on the amount a lender can charge for a loan will make borrowing less expensive – given the rate at which over-priced short-term lending has risen over the last few years.

This will have a knock-on effect on saving behaviour and investment. It will also get more people spending on the high streets and not putting dead money in the pockets of exorbitant lenders.

It doesn’t boost illegal moneylending

Jo Swinson MP says capping the cost of credit will boost illegal moneylending, yet there is far more evidence to the contrary of this. Important work carried out in 2010 by Professor Dr. Udo Reifner, Sebastien Clerc-Renaud, and RA Michael, for the European Commission, found no convincing evidence to back up the argument that introducing interest rate ceilings leads to a growth in illegal lending “or would force people into arrears and default on bill repayments”.

In fact it is found in the same report that in spite of the fact the supply of credit in France and Germany is not as abundant as in the UK, this has not been matched by an increase in illegal lending.

3 Responses to “Three reasons why we need a cap on the cost of credit”

  1. treborc1

    Maybe the real reason is that government see these lenders as the people who will keep the poor happy with loans, as they rip the heart out of welfare, mind you not that Labour would do much.

  2. JC

    Well if it’s all that simple, we should definitely be doing it. However, I feel that a cap on the rates would lead to more people being refused loans. I believe they would turn to alternative supplies, but maybe they would just decide that they didn’t need the money anyway and go home.

    It would certainly make payday loans less profitable (which is the point) and reduce the number of companies involved. This is probably a good thing unless it leads to the above.

  3. Carl Robert Packman

    Half the problem is the supply and demand problem, ie if you cut off the supply the demand goes to whatever is available, which could be illegal loan sharks. However these measures cannot be isolated, the government needs to address the supply side of the debate too, which includes funding for credit unions, shop-fronts for them and other ethical financial institutions, return the social fund, and obliging mainstream banks to meet lending quotas. These are big asks, I realise, but the problems offset by problem debt, which is only bolstered by payday lenders being able to charge what they can on loans, is a big problem as well.

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