MSE News: MP renews call for cap on payday loan costs

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This is the discussion thread for the following MSE News Story:

"3.5 million Britons expect to need a payday loan to make ends meet in the next six months, new figures have revealed ..."
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  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    Just to play devil's advocate for a minute, why is there not more competition in this market driving down costs?
  • dealer_wins
    dealer_wins Posts: 7,334 Forumite
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    Shocking stats indeed.

    Sorry to sound harsh here but out of those 3.5 million I bet most could easily avoid any sort of loans if they lived within their means and didnt waste loads of money every month on non-essential stuff. (eg sky, expensive mobile contracts etc etc)
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
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    pointless;

    we need to raise to age at which credit is available to 21
  • wizk1
    wizk1 Posts: 911 Forumite
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    CLAPTON wrote: »
    pointless;

    we need to raise to age at which credit is available to 21
    Do you assume that the level of common sense is proportional to age?
  • CHR15
    CHR15 Posts: 5,193 Forumite
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    Just to play devil's advocate for a minute, why is there not more competition in this market driving down costs?

    It isn't a competitive market.

    As long as you promise to lend money, the rate doesn't matter, you will have floods of applicants.

    The risk is too high to sustain low rates so the business would fail, the repayers need to support the idiots or the cash flow stops dead.
  • Paulgonnabedebtfree
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    CLAPTON wrote: »
    pointless;

    we need to raise to age at which credit is available to 21

    I had never had any loan or other credit until I was 30(I had one credit card that I never used - it doubled up as a cheque guarantee card).
    Wish I had stayed that way too.
  • Jeff_Bridges_hair
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    The main issue with these loans is down to the FSA themselves requiring lenders to show the over APR for the year - thats how you get a figure so high from anything from 1000% to 5000% when in reality those that can afford to repay the interest is only really 25%. And when you look at it like that then thats not bad for a short term instant money today loan.

    If they start capping the yearly APR these lot will just start whacking on ever higher fees or indeed stop lending to people which will probably then throw these sorts of loans back into the illegal loan sharks hands which would be even worse.
    "If you no longer go for a gap, you are no longer a racing driver" - Ayrton Senna
  • Leon_W
    Leon_W Posts: 1,813 Forumite
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    Surely the rates are high because the risk of default is also high ?

    As soon as you introduce a cap that doesn't reflect the risk to the lender then they'll just shut up shop, prompting complaints about lack of credit facilities. It will also just drive such borrowing underground where the least of your worries is a few letters and phonecalls, more like burly collectors interested in knee caps.

    The way to solve most of the problem is simple. In the mortgage market, if you already have a mortgage, it is very unlikely that a different lender will advance a completely new loan without the existing loan being repaid. This information is readily available from credit reports.

    It's not difficult to find evidence on these boards that payday loan companies lend to customers knowing full well that they have outstanding balances with other payday loan companies. Therefore, instead of applying a cap, perhaps limit the number of loan companies per customer to one or two. This would effectively stop the continual refinance of debt with other companies, reduce the customers (and companies) exposure to defaulted loans and encourage people to look at the real reasons they are in debt.

    It seems to me that the interest rates charged get higher and higher because of the vicious circle effect. If someone has 5 payday loans running concurrently then the risk of default to these 5 companies is much higher than if there was just 1 or 2 companies lending money.

    Therefore legislate, and put the onus on the payday loan companies not to take on a customer if they are already a customer of another payday loan company.

    Capping the rates will just seem to make the loan more affordable to the customer who will then feel they can take on more debt with other companies, with my suggestion this wont happen and rates should fall naturally for those with a proven repayment history.
  • 2sides2everystory
    2sides2everystory Posts: 1,744 Forumite
    edited 8 December 2011 at 3:54PM
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    CLAPTON wrote: »
    pointless;

    we need to raise to age at which credit is available to 21
    pointless? :p - it's priceless :money:

    Can't help wondering how that fits in with Martin Lewis encouraging kids of 15, 16, 17, 18 to blunder into signing SLC forms to fund their own higher education?
    The main issue with these loans is down to the FSA themselves requiring lenders to show the over APR for the year - thats how you get a figure so high from anything from 1000% to 5000% when in reality those that can afford to repay the interest is only really 25%. And when you look at it like that then thats not bad for a short term instant money today loan...
    I am not sure why you think a usury of 25% is not bad (or perhaps not indecent?).

    I caught a Radio 4 Moneybox edition earlier over the weekend I think or maybe earlier this week - it wasn't about payday loans but about unauthorised overdraft charges and personal reserve charges which in one case actually seemed to be 300,000% ! Paul Lewis said that over 2000 years ago the Romans decided to cap loan interest to just 8%.

    There's much to be said for it. It would drive financial services players into a completely different arena for a start, far from the gladiators and worthies they associate themselves with right now.

    Christus_austreibt.JPG
  • Apples2
    Apples2 Posts: 6,442 Forumite
    edited 8 December 2011 at 5:37PM
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    2000 years ago the Romans decided to cap loan interest to just 8%.

    There's much to be said for it. It would drive financial services players into a completely different arena for a start,

    Well it would be an End Game for short term lenders for a start.

    A capped 8% APR on a £100 loan for 7 days would not even pay enough for someone to answer the phone, let alone pay for the phone line.
    Give us a real life figure which YOU think is acceptable to borrow £100 for 7 days?

    What would YOU charge for this, bearing in mind you have staff wages, Offices, Consumer Credit License to pay for as well as the risk you may have to chase someone up for not repaying...
    Go on.. give us your figure....

    EDIT: Consider it against a profit markup for a tangible good. Keystone markup is about double, buy at £50, sell at £100.
    Companies must markup to make the business profitable, tha markup could run to many 100's%

    Maybe we should also campaign to limit profit to 8% too, it would shut the entire High Street.
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