Payday loans, interest rates need capping?(31 Posts)
A few days ago I started a thread on this but wrongly linked to a petition (sorry MN Towers) however I was really interested in people's comments, varied and thought provoking.
Perhaps we can restart the thread but without contravening the rules.
This caught my attention today,
Capped to where, that's the elephant in the room. If 4000% is too high and 10% is unworkable where exactly do we cap it so that companies can still make a living lending small amounts of money to people with poor credit ratings, CCJs and low incomes? An advert I saw yesterday stated 1,472% APR which sounds horrendous grossed up over a year but which probably equates to a £20 charge for borrowing £100 in a hurry.
I find the Huffington Post's reference to 'legal loan sharks' nonsensical. Truth is that these businesses are regulated, audited, open about their charges and there is legal protection for the consumer. Borrowers have the information and should know what they are agreeing to. If lenders can't cover their costs they will either tighten up their lending criteria or stop trading. Then those needing a few quid in a hurry will be back at the mercy of genuine loan sharks.... and I don't think that is any kind of improvement.
Cogito, you are far too generous to these companies. They prey on the poor. They claim, falsely, that taking one of their loans helps to repair your credit record. In fact the reverse is often true. And once you've taken one loan, they bombard you with offers of others, in increasingly large amounts - amounts that they know full well you couldn't possibly pay back because they know how much you get paid.
They are indeed legal loan sharks who cause widespread misery. When they try to claim ridiculous amounts of money from debtors, the courts should tell them to fuck right off. Insisting on being repaid £4k for a loan of a few hundred - it's little short of outright thievery, especially as they know their customers are desperately poor.
Unless we have education about loans, intrest rates, penalty charges etc taught at school how are the majority of people really meant to understand?
Studying economics GCSE was a slight help, but the small print is hard
The majority of people understand money, interest rates and so on well enough. There will always be a minority who take risks, ignore information or behave stupidly.
I don't think it's the interest rates that need capping so much as the total to pay back.
e.g. you can charge 82,000% apr if you like but the amount to pay back should never reach more than double what you borrowed.
APR of borrwing £20 and buying a pint to say thanks.
Martin Lewis on payday loan regulation
I don't object to high interest rates. I do object to pushy sales and encouragement to roll the loan over or to take out a larger loan than intended.
Trills, good point, maybe the cap should relate to the total amount that you have to pay back - it should not exceed twice or thrice the initial sum borrowed.
Cogito, no, most people don't understand interest rates. That's how payday lenders get away with it - that and sheer desperation. What do you do if you have £50 to live on until payday and someone smashes your windscreen and it's going to cost £350 to replace (and your insurers won't help because you can only afford third party fire and theft)? How do you get to work if your job is minimum wage night shift in a warehouse and there's no public transport?
These companies aren't honest and decent. They send multiple messages trying to persuade people to take out further loans, offering vast amounts that they know full well people can't pay back. It's very easy to sneer at the customers if you are in the fortunate position of being able to afford to fix your washing machine when it breaks but the exercise of a little imagination, and a little logic wrt how responsible it is to pester people to take out loans they cannnot afford will show you that sneering is misguided.
The more I hear about the pushy nature of these companies the more concerned I get. The adverts are bad enough.
Two members of may family have had a bad enough time with banks and credit cards. One running up over £10,000 on a credit card when unable to find a job after uni.
Should add that the total amount was mostly interest.
"What do you do if you have £50 to live on until payday and someone smashes your windscreen and it's going to cost £350 to replace"
That has nothing to do with understanding interest rates and I resent being accused of sneering. You're talking about the desperation of poverty and my point is that, if regulated lenders have to start employing stiffer lending criteria (which goes hand in hand with taking on more risk and/or a lower income) then desperate/poor people will find alternative ways to get money, probably taking even bigger risks in the process. The problem will not disappear it will simply get displaced.
I don't approve of pushy sales techniques whether we're talking a short-term loan, a regular credit card, overdraft or any other financial product.
It does have to do with interest rates, because if you desperately need to repair your car windscreen and you can't get a loan from a high street bank, you have no choice but to resort to dodgy pay day lenders, no matter what the interest rate.
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If you borrow £1000 on a normal credit card with an APR of, say, 25%
and just repay the minimum
do you know how long it will take to pay it off and what the total cost will be ?
its 18 years and £2000 by the way
The more you restrict the interest rate, the more stringent they will be on who they will lend money to. The people with very bad credit ratings will just have to turn to illegal money lenders. As much as you may not like them, Wonga.com never broke anyones legs for not paying them back.
As cozy said, if the return is not high enough for the risk, lenders will not lend. Restricting interest rates will stop people being able to borrow. The truth is most poor people should not be able to borrow as they cannot afford the repayments - sad but true
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> The more you restrict the interest rate, the more stringent they will be on who they will lend money to. The people with very bad credit ratings will just have to turn to illegal money lenders. As much as you may not like them, Wonga.com never broke anyones legs for not paying them back.
Right, because capping at 200% profit in one week is going to stop these loan sharks lending, right?
Perhaps these rates are set at what they can get away with, rather than what they need to reproduce their business...
"Right, because capping at 200% profit in one week is going to stop these loan sharks lending, right?"
The number is debatable but the principle is correct. The reason people go to pay-day lenders is usually because they can't get credit elsewhere and are likely to default. The level of bad debt that has to be built into the business model is going to be extremely high and that's a direct cost to the lender.
Here are some of your arguments addressed, Cogito:
Veronika Thiel Introducing price caps in the UK
The discussion around price capping for credit has warmed up again over the past few months thanks to the sterling work of Stella Creasy who is campaigning to introduce a cap on the total cost of credit in the UK.
There are many good arguments for the cap, which would prevent the usurious pricing practices that are in place at the moment, e.g. charging £85 for a loan of £100, for the sole reason that the banks wont touch you. The Competition Commission in its inquiry to the home credit market has found that the cost is too high but the measures it suggested to rectify this have not resulted in decreased lending costs.
Opponents to a cap bring some arguments forward that are in and of themselves logic but there is not a lot of evidence to back these arguments up. Furthermore, they often confuse interest caps with price caps, two related, but different things. In this blog, I will briefly summarise the oppositions views and set out why they are wrong.
Firstly though, a word on interest rate caps vs total cost of credit. Interest rate caps put a limit on the annual percentage rate that you can charge on loans, for example, a maximum of 20%. This is not a good measure, as APRs are confusing and not a good indicator of price. The longer the loan repayment terms, the lower the APR but the higher the overall cost of credit, and vice versa. Also, interest rate caps can be circumvented as there is no clear agreement what costs should be included in their calculation e.g. admin fees, early repayment fees and similar. Hence we are talking about a cap on the TOTAL COST OF CREDIT, a level which still has to be set, but would probably be somewhere between £25 and £35 per £100 lent. This is clear cost structure that people can understand and which is much harder to circumvent. This is what is currently proposed and opponents should be aware of this. Suggesting that Stella Creasy is proposing an interest rate cap is misleading and heats up an already charged debate.
But now for the arguments:
Caps on the cost of credit would drive people into the arms of illegal loan sharks. A logic argument, but albeit a hypothetical one. As I have pointed out in my report Doorstep Robbery, the research suggesting that there are high levels of illegal lending in countries with interest rate caps (note that this research was NOT about a cap on the total cost of credit is flawed. Furthermore, a report for the European Commission on interest rate restrictions in European countries (opens as PDF) on has also found that there is no empirical evidence for this link.
A cap would put high cost lenders out of business. Again, a logic argument, but not one necessarily borne out by reality. The industry justify its charging of high prices with the high risk that they incur. However, payday and home credit lenders wont share their pricing models, so we dont know if their prices are actually justified by the risk. The aforementioned Competition Commission investigation is littered with blanked-out numbers in the name of protection of commercially sensitive information, so we simply dont know if the high prices are really just down to the high risk profiles of customers, or if they are routinely overcharging their clients. Given the fact that companies keep on lending to the same people, it would suggest that clients do repay, and that their risk profile is actually not as high. Furthermore, companies like Provident Financial does operate in two countries with a form of price ceiling namely Poland and Ireland. So, there is again no evidence that a price cap would necessarily result in the demise of the high cost lending sector
People like home credit. A form of high cost lending that is often singled out is doorstep lending where collectors will come and collect instalments from their clients home. The Joseph Rowntree Foundationconducted research in 1994 that shows that people liked this element of home credit as it requires them to be disciplined and have the money ready at a fixed date in time. The Competition Commissions report also found high levels of satisfaction, and clients were aware that they were paying a high price. So, why try and stop something people like? Two reasons:
Firstly, home credit is for many the last option, especially for those without bank accounts. If you have not got an alternative, then of course you will like the services offered by the one company that will deal with you. If there were an alternative, e.g. the increased provision of affordable lending that offers exactly the same services but minus the expensive doorstep collection, would people really baulk at dropping off their money at an office around their corner if it would save them around £50 per £100 borrowed? Somehow, I think not. The question is how important the home collection element really is, especially in those areas where affordable credit is available.
Secondly, the research conducted is quite old now, especially the one by the JRF things have changed in the meantime. Recent research by Human City* shows that debt is high on the list of problems among social housing tenants, and that would like to see social landlords offer them affordable credit options. This new evidence should be taken seriously as it suggests that people are falling out of favour with high cost credit. With the expansion of affordable credit provided by CDFIs and Credit Unions, people also have more options available to them, and it would be interesting to see the choices people make in areas where affordable credit is established.
In short, the potentially negative consequences of a price cap might be hypothetically logic, but are not borne out by empirical evidence.
There are many more points that I could discuss here, but a blog is too short to deal with them all at the same time I hope to do so over the course of the summer. Two points to finish though:
Firstly, there is an absolute need to limit the availability of high cost credit as more and more households struggle to make ends meet and to service their debt. If people cant afford repayment of their existing (and quite possibly cheaper) credit options, surely throwing extraordinarily expensive credit at them will only add fuel to the flames its a short-term solution, but one that could quickly lead to a debt trap, and will hinder personal recovery.
Secondly, the continued insistence by opponents of price caps that it would especially be harmful to doorstep lenders and their clients is a curiously defeatist point of view. Is home collection really the best way to serve the poor? It is unacceptable in my view that the poorest have to pay the highest prices both from a moral as well as an economic perspective: high cost lending is not a social service to the poor, its the outcome of a deeply flawed credit and savings system in the UK that does nothing to help people out of poverty. A cap on credit costs is a first step in rebalancing this system.
*In the interest of transparency, this research was supported by Compass who are campaigning with Stella Creasy for the introduction of a price cap.
Veronika Blogs at http://verothiel.wordpress.com/
Just on the point about people understanding interest rates and borrowing... I work with low-income people with housing issues. I facilitate classes and we talk about payday loans and debt and credit. No, people do not understand interest and debt. At all. I frequently have a room of 10 or more people, none of whom understand interest rates, APRs, fees, and the cost of borrowing.
Here's a thought Tossa... rather than just plaigiarising other people's ideas, why not actually contribute some of your own?
anyone who went through seven years of education has no excuse for not understanding interest rates. The hard bit is having the choice.
BTW the 'funding for lending' scheme is another government bright idea to increase lending from banks. It is destroying savings rates because the banks can now get cheap money, BUT the banks are still lending less than they ever did. The government seems unable to see this, probably because it is right in front of their noses.
payday loans companies do indeed charge incredible sums. Until the government forces the big banks to 'unstick' credit (under regulation) their market continues to be there.
"anyone who went through seven years of education has no excuse for not understanding interest rates." They don't have any excuses, they just don't.
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