Legal loan sharks and payday lenders are circling and targeting the weak; charging those who do not have access to affordable credit up to 3000% APR on each loan they take out.
There is no legal limit on the amount of APR that can be charged on doorstep or payday loans. Britain is one of the only countries in Europe which does not have a cap on lending rates; Germany, France, Austria, Italy, Switzerland, Ireland and Poland are among countries which have passed laws that restrict interest rates at levels which range from around 15% to 200%.
The 200% ceiling may seem high but it must be placed in the context of the outrageous interest charged – legally – by fringe lenders across Britain. Standard APR charged by lenders such as Provident Financial on a loan of £100 is 545% while Payday UK advertises a rate of 1,737% for a loan of £80.
We are calling for a lending rate cap, similar to those in place across Europe and many states in the US, along with other measures to ensure everyone has access to affordable credit.
The Office of Fair Trading has recently declared that it does not believe a lending rate cap would be effective, as fringe lenders provide a desperately-needed source of credit for low income borrowers. Furthermore, they claim that in countries such as France and Germany, where caps do exist, the lack of a sub-prime market has caused credit to dry up for those who truly need it.
They are wrong on both counts. Firstly, the experience of credit unions and microfinance institutions around the world has shown that to make profit from lending to low income borrowers you do not need to charge extortionate rates reaching into hundreds or thousands of percent. A pertinent example of this is Fair Finance in east London, which charges rates of around 35% and provides local people and small businesses with the funds they desperately need to survive. Their default rate is around 6% – much lower than that experienced by credit card companies.
Secondly, the lack of a sub-prime market where doorstep loans and payday credit is readily available is not a pressing concern if a country’s banking system is financially inclusive. Both France and Germany have legislation in place to ensure that their banks do not exclude those who need their services most. In the UK around 15% of people find themselves refused credit from a high street bank – in France this is below 6% of the population, and is only 2.5% in Germany. These countries also have fewer unbanked people in comparison to Britain.
Both Germany and France have lending caps in place; in Germany rates are capped at twice the market rate, whilst in France the limit is reviewed quarterly. Furthermore, there are restrictions on where credit is available from – in Germany only banks are allowed to supply credit, whilst France has strict regulations for credit institutions. Subsequently, the supply of sub-prime credit is matched by a reduced demand.
By comparison, in the UK it is relatively easy to obtain a license from the Office of Fair Trading and to establish your own credit company. This, combined with no legal limit on the total cost of credit, results in a glut of high cost loans targeted at those that avoid or are denied credit from mainstream banks. . The issues of uncapped credit and financial inclusion feed off each other.
The introduction of lending rate caps must therefore come hand in hand with financial reform. Banks have been allowed to run riot for long enough – they must now serve the people. A simple step which would greatly reduce the demand for fringe lenders in the UK would be to tighten the rules on basic bank accounts, which helps low income households avoid the poverty premium and begin to solve the problem of financial exclusion.
Currently UK banks are obliged to offer basic accounts but often do not publicise them well or provide poorer services to basic customers than to those holding a current account. In Germany and France, however, banks are very limited in whom they can refuse an account and have basic bank accounts designed for those who have been declared bankrupt or refused credit; in the UK these are the main reasons why individuals are prevented from opening a basic account.
The Office of Fair Trading’s analysis of the impact of lending rate caps is flawed; caps are desperately needed to end the exploitation of those on low incomes who are charged extortionate rates to access credit they require for everyday items. When used hand-in-hand with financial reform to make mainstream banks more financially inclusive, caps can help provide a fairer cost of credit for those who need it and, ultimately, end legal loan sharking.