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2,000% APR loans to stay on sale

Shark

Loan sharks aren’t the only way to get sky-high APRs. After a year-long review, the Office of Fair Trading (OFT) has decided not to cap the high cost of credit products. Has the regulator made the right move?

Some people are gifted with the rare ability to do complex financial sums on the spot. Sad to say, despite being a personal finance journalist, I am not one of them. Nevertheless, I don’t think you need a financial qualification to work out that any loan charging 2,000% APR is a pretty rough deal.

This is why OFT’s decision not to cap the rates charged by some lenders has come as a shock to many. After a year-long look at high-cost credit products, the regulator has concluded that “in a number of respects, these markets work reasonably well”.

In what way is this market working well, I wonder, when people are being charged exorbitant rates of interest? How can it be right that firms offering high-cost credit remain unregulated, when – according to critics – they target and exploit vulnerable consumers?

Why sign on the dotted line?

Payday loans are, in theory, designed for short-term borrowing. The idea is that the small sum you borrow – perhaps just a couple of hundred pounds – will help tide you over until payday.

You might be expected to repay the sum borrowed, plus a fee, within 30 days. So payday lenders often complain that working out how much these deals cost over a year to come up with an equivalent APR (such as 2,000%) is unfair.

Yet there’s no doubt these loans are expensive in comparison with other forms of credit. Moreover, payday lenders are often prepared to let customers ‘roll over’ their balances for another month in return for another fee – so the sums people owe can quickly spiral out of control.

So why are people drawn to these products? Because there is often no alternative.
Consumers who take out payday loans are not desirable customers as far as credit card companies are concerned, and banks are typically unwilling to lend small sums over short periods. In other words, the lack of choice for people with poor credit history allows for firms to charge sky-high rates.

Payday loans vs. loan sharks

This is at the root of OFT’s decision. The review states that introducing an APR cap could make matters worse, by further reducing the availability of loans for credit-impaired consumers. In turn, this could drive people into the arms of payday lenders’ much tougher, meaner cousins: illegal loan sharks.

So while it’s easy to point the finger at OFT for not slashing the rates lenders can charge, it does seem the issue of high-cost credit is about more than uncompetitive APRs. After all, the high-cost credit sector exists solely because ‘mainstream’ credit is unavailable to some consumers who wish to borrow.

If we’re to rid ourselves of 2,000% APR loans, we need to take radical measures to combat financial exclusion and allow everyone to borrow at reasonable rates.

In the meantime, expensive payday loans and their bedfellows must be treated as loans of last resort – and avoided wherever possible. If you’re in urgent need of credit and can’t borrow on a credit card or from a bank, talk to your local credit union.

Comments
Guest
Tom Ritchie says:
3 July 2010

You are spot on Laura. The OFT conclusion that these markets ‘are working reasonably well’ is about as flaky as it is possible to be. The reality, as you say, is that many people who use these services don’t keep up their payments and end up rolling a relatively small debt up month after month until it becomes a very large one indeed.

What they should have come up with was a cap on the level of interest that could be charged – one that would allow lenders to protect themselves against the risk of loan defaults and make a profit without taking their customers to the cleaners if they rolled their loans over.

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Guest

News out this week shows that payday loans are on the increase. Consumer Focus says the number of people taking out costly payday loans has quadrupled to 1.2 million over four years. Even more reason to sort the sums out on these costly loans and create more competitive alternatives.

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Guest

Surely it is up to the borrower to be responsible for their loan??

If you need to borrow say £150 for a week and you are charged £15 for the privilege – you know you need to pay back £165 at the end of the week – the annual rate of interest to you is irrelevant.

If you borrow more than you can afford to pay back – then the person to blame is yourself

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Guest

Err……. we seem to have yet another richard WHY????- I didn’t write the above –

Which? please get your act together.

Though I agree with the sentiments stated – I DID NOT WRITE THEM!!

YES I am shouting – this is the SECOND TIME!!!!!!!

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Guest

Hello Richard, are you absolutely sure? We had presumed this was you. However, this comment is from August and the problem you have encountered was rectified in October when you raised it with us. Thanks.

Edit: Hi Richard, I just checked the email address used to post the comment above and it is indeed yours. It was quite a long time ago so you may not have recalled writing it.

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Guest

Hi Patrick – Yes it does seem it was me – profound apologies

I find it a little confusing that the comments and conversations remain intact for months.

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Guest

Hi Richard,

Yes all Conversations are retained, with each comment dated. This is the norm for websites and it means we can refer back to articles and your comments in the future.

On a slightly related note, it may be a good idea for you to upload an avatar – any type of picture that you would like to represent yourself (needn’t be of yourself). That way you can be differentiated from others. You can do so by using this link: https://conversation.which.co.uk/your-account/

If you need any help with this please use the contact us form – we’re going a little off-topic! Thanks.