The payday loan market was worth around £1.9 billion last year. APRs of over 1,000% are common. So is it time to limit the interest rates they charge? Martyn Saville talks to Mark Lovell, Executive Chairman of A4E.
Martyn Saville: I’m not convinced about loan caps until we’ve seen more extensive research into the effects of limiting annual percentage rates (APRs). The risk is that hard-up consumers will be excluded from mainstream credit and may turn to illegal alternatives.
Mark Lovell: I agree. APR as a calculation of the cost loan of £100 for one week is a misleading measurement in the context of helping people manage debt and change financial behaviours. Putting a cap on interest rates will only push more people to the unregulated market as lenders become more selective.
MS: As we revealed last week, there are potentially bigger problems than high APRs facing people using some payday lenders right now. Guaranteed loan rollovers allow people to borrow one month after another, while unsolicited increases in the amounts you can borrow could encourage consumers to get into unmanageable debt very quickly.
ML: Using pay day loans is a symptom of a lack of access to a range of financial services for vulnerable consumers – not necessarily a cause of making them hard up. Repeated and multiple use of such loans, however, is often a cause of financial hardship.
MS: So what’s the alternative? For me, a first step would be to hugely expand the credit union and community lending (CDFI) sectors, with appropriate government support.
ML: What’s needed is services that are relevant to vulnerable consumers. For example, this includes products allowing direct debits for utility payments – leading to savings of around £200 per year. This requires banks to be offering ‘jam jar’ types of accounts helping these consumers change their financial behaviour for the better to reduce the need to access short term expensive lending.
We need competition to drive down costs. Credit unions and CDFIs are part of the solution but all of it. We need sustainable business models in this space – both for-profit not-for-profit – with a focus on the full range of products required by this consumer group, not just lending products.
What’s your view on interest rate caps? And what reforms would you bring in to make sure everyone can access affordable banking products tailored to their needs?