Pay-day loans

It is good news today (6 March 2013) that the Office of Fair Trading has told the top fifty pay-day loan companies to change their practices or risk losing their licences – see http://www.oft.gov.uk/news-and-updates/press/2013/20-13.

But, it is bad news today that the Government is not going to cap the price – interest and costs – of borrowing from pay-day loan companies – see hidden near the bottom of this news release from Consumer Minister Jo Swinson and Economic Secretary to the Treasury Sajid Javid: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/136548/13-702-the-impact-on-business-and-consumers-of-a-cap-on-the-total-cost-of-credit.pdf.

Pay-day loan companies are shameless about their extortionate costs, which assault the poorest, whose circumstances deny or limit their access to cheaper credit. Adverts on television and the companies websites show APRs – annual percentage rates, which include interest and others costs – exceeding 1,000%. At the low end, Quick Quid’s representative APR on its website is 1,734%, while Wonga.Com’s 4,212%. The companies say that comparing APRs is unfair because loans are designed to be repaid in days or weeks, but those pay-day loan companies that show interest separately, that is without other charges, on their websites show rates of 300% and more.

This is naked exploitation of economically vulnerable people. The market does not protect them and so the government should.

By contrast, Leeds City Credit Union’s website says its APR is 26.8%.

Ministers’ justification for not acting is research commissioned by the Department of Business Innovation and Skills from the Personal Finance Research Centre at the University of Bristol, also published today, “The impact on business and consumers of a cap on the total cost of credit” (https://www.gov.uk/government/publications/the-impact-on-business-and-consumers-of-a-cap-on-the-total-cost-of-credit).

The researchers were not commissioned to make recommendations, “but to provide an up-to-date evidence base” to help ministers’ policy decision making. The research finds some evidence of the pay-day loan market shrinking where price caps have been imposed, but not that these loans would disappear. Borrowers surveyed said they would find alternatives. The researchers suggest expanding and modernising credit unions could help. In one place costs had risen to the level of the price cap, so that borrowers paid more, but it appeared that in that place the price cap was not used to reduce costs. The Office of Fair Trading had said previously that price caps would be expensive and difficult to administer, but the research found little evidence about this except in Australia where a price cap was considered to be straightforward and so likely to be cheaper.

The research seems to me to support a price cap more than it makes the case against.

Labour and Co-Operative MP Stella Creasy, shadow minister for crime prevention, is leading calls for pay-day loan price caps and other reforms, although Labour failed to act when it was in government.

This issue should be close to the hearts of Liberal Democrat ministers. Taking low earners out of tax is only the start. Removing the oppression of pay-day loan companies’ ravenous loan costs is an urgent next step. Liberal Democrat ministers should ensure that capping these loan costs no higher than the level of high street banks or credit unions is in the Budget in a few days’ time.

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