Labour MP says people shut out of mainstream credit are 'sitting ducks' for firms that charge more than 2,500% APR, writes Peter Walker in the Guardian
The government faces fresh pressure to introduce a cap on the interest rates payable on short-term "payday" loans targeted at poorer consumers, after a cross-party group of MPs – including David Miliband – signed up in support of a motion demanding action.
The Commons backbench business committee will today discuss a motion put forward by two MPs – one Labour and one Tory – calling for new regulation in the home credit market, which according to some estimates has grown fourfold in the past two years as mainstream lenders such as banks restrict consumer lending.
One study found that 1.2 million Britons each year tide themselves over with temporary payday loans, which can charge more than 2,500% APR. The motion could be debated by the full Commons early next month. A vote in favour of action, while not binding, would put huge pressure on the government to cap lending costs in an area of credit that campaigners say traps the poor in a cycle of debt.
Stella Creasy, the Labour MP proposing the motion with the Conservatives' Justin Tomlinson, said she had met one person in her east London constituency with nine separate loans outstanding from the same short-term credit company. She said: "People who are shut out of mainstream credit are sitting ducks for these companies. There are so few of them dominating the market that there's no proper competition."
A number of other countries, including Canada and many parts of the US, impose maximum repayments for loans, but this is not the case in the UK. Creasy said: "One of the reasons these companies are expanding so fast here is that we're one of the few unregulated markets left."
The UK's short-term lenders, including the market leader Provident and the fast-expanding newcomer Wonga.com (whose logo is disgracefully splayed on Blackpool’s shirts, pictured), insist they are responsible and transparent about interest and fees. APR levels – which must be declared by law – can reach close to 3,000%, but they argue that such an annualised figure is meaningless for loans repaid within days or a couple of weeks.
Last year an opinion poll by the campaign group Compass suggested that almost seven in 10 people wanted a government-imposed interest cap. Several debt support charities support such a move, but others argue that it could restrict credit to some people, driving them to use criminal loan sharks.
Last year the Office of Fair Trading, which regulates consumer credit, submitted a review of so-called high cost credit to the government which also came out against price controls. This is now being considered by the Department for Business, Innovation and Skills.