Friday, 9 March 2012
Pay Day Loans
A Common Select Committee yesterday discussed the issue of “pay day loans” and the high interest rate charges that are applied.
The use of Pay day loans is indeed a time-bomb that needs to be addressed. There are also many internet loans now available which offer short-term loans of sums up to £1,000 per month. These companies are charging extortionate interest rates. Octopus Loans quotes one of the lowest APRs which is 1737%, Quick Quid quotes an average APR as being 2222.46% on a loan of only £50 and Wonga’s homepage declares a “representative APR as being 4214%. Although many of these companies say that the only lend to those with existing credit histories, the trap is that regular payers can increase what they can borrow, which can lead to serious problems. Of course, payday loans are supposed to be for emergencies. The problem is that for many people, topping up their incomes at the end of the month is not an occasional occurrence, but a way of life.
Surely what we need is a legal solution. The law has to be changed to address organisations that charge these extortionate credit rates and ensure that there is a ceiling on the amount that can be loaned to individuals. In an economic downturn, there will always be a market for loans and easy forms of quick cash. Payday loan websites and shops are just part of that phenomenon, but they are able to exploit a gap in Britain’s consumer protection laws: we have no usury laws.
Many other countries have a cap on interest rates. In Germany, lenders cannot charge more than 20% interest a year. Italy brought in a legal definition of usury in 1996. The US states all set their own caps on interest rates, some higher than others, and a Consumer Financial Protection Agency was created last year to supervise this at the national level. Payday loan interest rates are capped at 60% in Canada.
There has been political pressure for a similar cap in Britain, led by the End Legal Loan Sharking campaign and others. We as a church have recently been interested in the work that Dr Stella Creasy MP has been doing around these issues. A cap isn’t a straightforward solution however. An investigation by the Office of Fair Trading concluded that it could encourage lenders to hide the charges in fees and fines instead, and make things less transparent for borrowers. It could also drive desperate borrowers to illegal lenders.
I think there’s a place for a cap if it’s set at the right level, but it needs to be complemented by other measures. Perhaps payday loan companies should be taxed in proportion to their average rate of interest, and there should be controls on the ways they can advertise.
In some ways it is too easy to look to regulating the loan companies, when the bigger issue is the culture of debt that creates the market for their services in the first place. There’s a need for debt counselling, free financial advice, and education on budgeting.
And that brings us up against an even bigger problem – personal debt is great for the economy and is an easy way to prop up GDP. The government will hesitate to do anything to discourage it, no matter how predatory it becomes.
This is an issue we have to address and action should be taken to reduce the increasing debt the country faces. A good starting point would be to have every company and organisation that can afford it working towards paying all employees at least the Living Wage.