MSE News: An interest cap 'could drive people to loan sharks'

Former_MSE_Natasha

Tuesday 9 November 2010

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

Read the full story:
An interest cap 'could drive people to loan sharks'

thermalsocks

The very high interest rates charged by credit card companies mainly effect and exploit the vulnerable in our society. If you have a job and money you can easily get any credit card with upto 15 months 0% interest and you can also afford the 3% fee to balance transfer to a card that offers 0%. However, if you are down on your luck and having just bought a holiday, TV etc... on your card, you are suddenly made redundant or become sick and out of work then the credit card companies will not keep your interest rate low when the 0% period ends. If you don't have a job you can't get a new 0% card to transfer too regardless of your previous credit worthiness. So you can find yourself paying upwards of 29% or more interest on your outstanding balance. Even if you are still in a 0% period, if you miss a payment one month then they will hike the interest up. If you just pay your minimum payment then after a while the card company will lower your limit to just above your balance putting you at risk of going over and attracting large fees and penalties. This is loansharking by any definition and should be outlawed. Before you say this is all rubbish I want to assure you that these things happened to me. MBNA being the villain here but all Credit Card companies operate the same way, a lot of it automated by a soulless computer and a customer service that wont listen and wont negotiate. So Credit Card companies are exploiting the poor and vulnerable so that they can offer 0% deals to the rich and make huge profits. It is immoral and should be stopped. I can not see any justification for charging more than 5% above bank base rates for any loan so this should be the cap.

CHR15

thermalsocks wrote: »

Credit Card companies are exploiting the poor and vulnerable so that they can offer 0% deals to the rich and make huge profits. .

How does that work then?

I buy something on a CC for £1,000 and repay £1,000

Maybe the CC campanies only want to do business with those low risk customers.
For high risk customers, those who don't repay on time, or repay at all, either turn them away or hike the interest rate.

I'm not trying to defend them, but they are a business, not a charity.

michaels

So best to restrict interest charges so loans are not available to those with less good credit ratings, so that for example rather than having a pay day loan costing 20 quid they can default on half a dozen direct debits costing hundreds in bank and company charges - what a brilliant idea...got any more good ones like that?

thermalsocks wrote: »

The very high interest rates charged by credit card companies mainly effect and exploit the vulnerable in our society. If you have a job and money you can easily get any credit card with upto 15 months 0% interest and you can also afford the 3% fee to balance transfer to a card that offers 0%. However, if you are down on your luck and having just bought a holiday, TV etc... on your card, you are suddenly made redundant or become sick and out of work then the credit card companies will not keep your interest rate low when the 0% period ends. If you don't have a job you can't get a new 0% card to transfer too regardless of your previous credit worthiness. So you can find yourself paying upwards of 29% or more interest on your outstanding balance. Even if you are still in a 0% period, if you miss a payment one month then they will hike the interest up. If you just pay your minimum payment then after a while the card company will lower your limit to just above your balance putting you at risk of going over and attracting large fees and penalties. This is loansharking by any definition and should be outlawed. Before you say this is all rubbish I want to assure you that these things happened to me. MBNA being the villain here but all Credit Card companies operate the same way, a lot of it automated by a soulless computer and a customer service that wont listen and wont negotiate. So Credit Card companies are exploiting the poor and vulnerable so that they can offer 0% deals to the rich and make huge profits. It is immoral and should be stopped. I can not see any justification for charging more than 5% above bank base rates for any loan so this should be the cap.

BLT_2

I am led to understand that Loan Sharks may actually be cheaper than the payday Loan companies as authorised by the FSA.

The Loan sharks however only break your legs while the Payday companies will starve you to death :-)

I know what I'll do, I'll log onto Experian lower my bills that will help me, my score of 999 will sure ensure a successful conclusion

Oh no, Experian sent me to loanfinder.co.uk to help with my financial affairs, there goes another 7 pounds for my score and a 69 pounds consultancy fee.

Looks like I am going to have to sell some more ganja on the street corner

jamesd

A cap could drive people to illegal lenders but that would depend on how the cap is set. It's possible to set such things at sensible levels that don't exclude consumers who present high risk from getting credit.

There are cases where a 20% cap means it's just not sensible for me to lend at one place at the moment. Elsewhere I am prepared to lend if I can get a rate that's competitive with other ways to use my money, after allowing for bad debts. But this is all lending to the top 50% or so of consumers, so these rates are well below the level that regulatory caps on total costs might be imposed at.

Declaration of interest: I make unregulated loans to other consumers (no OFT registration). Legally, though.

pjsmiffy

I shudder when I see TV adds for 2600+% with a relaxed and happy style. Something has to change!

Credit for the "credit worthy" is VERY cheap (30 to 56 days interest free is standard on most credit cards) as the companies get there fees from the retailers.

My only suggestion is a cap dependant on term and a rate over term comparison value for advertising.

Loan sharks are parasites and need to be dealt with very harshly, but when it comes to rates I see little difference from W****.com or other payday loans.

[Deleted User]

short term loans paid off on time attract reasonable interest,who in their right mind would borrow from a payday co etc for a year?if they did they deserve to pay every penny of the 2600%apr

mcgazz

"An interest cap 'could drive people to loan sharks'" is a daft argument. It's like saying that there's no point in taxing tobacco or alcohol because it could 'drive' people to buying smuggled fags or distilling moonshine in the shed. Similarly, you could argue that all drugs should be legalised so as not to 'drive' people to dealers.

I support an interest rate cap because doorstep lenders pretty much *are* loan sharks already.

jamesd

woodbine, it's easy for people to feel trapped in such situations. Assistance in finding alternatives and perhaps in managing finances is probably a better approach. if you come across anyone in that situation you might try referring them to Lenders Compared at least. It's the site set up as a result of the OFT investigation into doorstep lending to help make people more aware of alternative lenders in their area.

mcgazz, what's the minimum appropriate interest rate if half of all money lent is lost to defaulting borrowers? Has to be above 50% because it takes that just to cover the losses, any lower and lending is a charity giving money away, not a business proposition.

What do you think a cap on rate should be? What about cases where that won't cover the cost of defaults and administering the loan plus a reasonable profit margin? You might also consider that companies in the main UK stock market have on average returned 10.5% plus inflation a year over five year periods from 1978, so lending companies will need to get that much plus costs in order to be competitive with other companies.

Loan sharks are unregulated lenders who also use illegal methods to persuade people to pay - things like threats of violence. The rates charged by doorstep lenders are quite high but at least they don't go in for such criminality.

antrobus

mcgazz wrote: »

"An interest cap 'could drive people to loan sharks'" is a daft argument.

Absolutely, it's a bit like saying that prohibiting the sale of alcohol would have no effect on the supply of alcohol whatsover, and in fact lead to an increase in drinking, public drunkeness etc, and provide a boost to organised crime in the bargain.

Nevermind. It might be worthwhile looking at the results of Provident Financial and its Home Credit division, the nation's number one doorstep lender I believe, with a typical APR of 272.2%. For 2009 the results were;

Revenue - £673.7m
Impairment costs - £216.7m (that's bad debts to you and me)
Other costs - £288.4m (arranging those weekly door-to-door collections is an expensive business)
Interest - £39.7m (what it costs to get hold of the money to lend to customers)

- leaving a Profit before tax of £128.9m.

Now that's not a bad return (overall Provident made a 45% return on equity over all its business, which includes Vanquis and Yes) but, roughly speaking, were there to be an interest cap of anything less than 220% APR then the Home Credit business would not be viable and would therefore cease to exist. To be blunt, lending money to poor people is an expensive business, and you can't make it any cheaper just by government diktat.