In late 2012, concern regarding annual interest rates of payday loans caused the Labour party to propose an amendment to the Financial Services Bill. The proposed change provided the Financial Conduct Authority, a planned agency, with the power to limit payday loan rates, which range up to 4,000 percent. Several weeks ago, the Office of Fair Trading (OFT) confirmed that legal loansharking, which includes payday loans, has gotten out of control.
Blowing Away the Myth
There has been a widespread myth that only a few legal loansharks engage in irresponsible activity. The OFT recently revealed that this behavior is widespread and is not limited to compliance with existing regulations.
The OFT announced that it intends to refer these firms to the Competition Commission, an independent public body that conducts detailed inquiries regarding the regulation of regulated industries. Almost five million British residents are customers of legal loansharks and imminent cost of living increases will only drive more people to this borrowing.
An analysis from the OFT reveals that legal loan sharks receive 50 percent of their profits from customers rolling over loans and amassing loan charges from month to month. To date, the government has avoided capping what these companies can charge. British payday lenders and other legal loan sharks say that capping charges will prevent them from lending. Countries that do impose caps have lower personal debt and illegal lending levels.
As living costs rise and wages stagnate, many British residents find themselves without enough money each month. Restricting their credit access may result in additional financial distress. However, offering only exhorbitantly-priced payday loans is not much better say many legislators.
They are calling for regulation of costs and the requirement that lenders conduct applicant credit checks. Some even recommend a change in the way continuous payment authorities work.
Despite lobbying to the contrary by the legal loansharking industry, the Labour party has committed to capping charges that lenders impose. Families are struggling to make ends meet and the government is acting in their best interest. Though the issue seems to have gone beyond political party politics, the road to capping may be a long one.
Until capping becomes a reality, consumers should proceed carefully when considering payday loans. Some lenders are unscrupulous, making it important to get all details in writing up front and obtain clarification of any aspects that are not understood. Comparison-shopping helps an individual find a loan with the most attractive interest rates, charges, and repayment terms.