Andrew Smith, Marketing Director at commerical debt management company, Cleardebt, shares his personal views on Consumer Credit regulation. Cleardebt is a member of the Debt Resolution Forum.
Capping interest rates is a really bad plan - in my opinion it will be very counterproductive and mean that many who need access to credit for essential expenditure just won't get it.
The last government thought it would lick the problem of high cost credit by encouraging the friendly societies to lend to the financially excluded (or funts - financial untouchables, a term I helped coin: These are people the mainstream banks don't wish to have any experience of dealing with). The friendly societies, apparently, turned round and pointed out that, in view of the risk, they'd have to charge pretty much the same APR as the existing high cost lenders.
Take a look at this blog from Chris Goulden of leading anti-poverty campaigners, the Joseph Rowntree Foundation. If you can’t be bothered to click – the nub is this:
“In contrast, many home credit users in our research said they appreciate the relationship and service provided whilst realising that they are paying a high price. What they get for that price is a flexible service with no sudden charges when they cannot make the payments. The fact that such charges are built into the overall cost is one reason why the interest rates are so high. Another reason is that this is an inherently risky market to lend money to."
JRF research published in 2009 investigated whether it might be possible to translate the aspects of home credit appreciated by customers into a not-for-profit setting. Despite stripping out the profit and considerable start-up funding, the modelling still indicated that:
"With an £18 million subsidy, the APR on an average 56-week £288 loan would be 123 per cent (compared with 183 per cent commercially), bringing customer savings of £50. But to achieve a reduction to 100 per cent, APR would require a £90 million subsidy. Customer savings would increase to £72 per loan (£170 yearly on an average annual loan frequency of 2.34)."
So, not even charities can really do much better than those commercial providers who are risking their own money and not the taxpayers'. Cap the rate and you cut off credit supply to high-risk groups. They won't be able to replace their dishwashers or get the banger they need to get to work, fit to pass it's MoT.Great.
Then, is high cost credit actually that high cost? Used as intended, to tide you over at a critical time when you have a critical need, payday loans cost about as much as saying to your mate "lend me a tenner and I'll buy you a pint at the end of the month". They are tough - but not unreasonable.
Of course, especially here, there are exceptions – but there are lenders who charge a lot because it reflects the cost of risk as well as those that are just taking the piss.
Used as unintended, as rolling, renewed credit to finance an unsustainable lifestyle, they are usurious. But having a statutory duty to lend responsibly could end this: I'd suggest a maximum number of short term loans (three?) in a given period (a year?) and only two to be able to run concurrently. Oh - and tough rules on selling. Longer term high interest loans? A maximum net-income to advance ratio and a maximum loan period maybe?
And, whatever happened to the bank manager who used to ask you what you wanted the money for? Loans for frivolous purposes could be restricted and evidence of use of the money required.
The solution, of course, is to end poverty and ensure people have decent incomes. Like that’s going to happen sometime soon.
In the meantime, we could get rid of high cost credit all together and ensure the funt gets what he or she needs to deal with a money crisis and not pay through the nose.
The banks we own are making money hand over fist again: why not make them put 0.5% of their profits into social lending? By my reckoning that would be about £125 million quid - or 250,000 advances of £500. That’d be a start.
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