Should the OFT have allowed loans at rates of 2500% a year?

Saturday, June 26, 2010

Report gives payday loan companies green light as calls grow for mainstream lenders to offer more low-cost credit.

Lenders charging more than 2,500 per cent APR were given the green light last week as the Office of Fair Trading reported that the payday loan market worked "reasonably well" and there was no argument for imposing price controls.

But the verdict has renewed the debate over whether high-cost credit lenders are providing a much-needed service or preying on vulnerable borrowers who cannot get credit elsewhere.

The report looked at the £7.5bn loan market provided by payday loans, home credit, pawnbroking and rent-to-buy firms.

"It is a cruel irony that people who are already struggling financially have to pay so much to borrow money," says Marie Burton, financial services expert at Consumer Focus. "Unless more affordable credit is available, simply clamping down on high-cost lenders will not provide the answer because it may push people to riskier borrowing from loan sharks.

"The OFT's report shows that it would be very hard to boost competition among high-cost lenders and drive a better deal for consumers. It is therefore important that the Government considers how it can make sure lower-cost borrowing, like credit unions, is available to borrowers on low incomes."

Tom Howard, from the Consumer Credit Counselling Service, agrees. "High-cost credit fills a niche for people who are excluded by mainstream lenders. Provided people know what they have to pay and manage their accounts well, then there is not a problem. However, we would like to see the mainstream lenders step up to the plate and provide more options for these borrowers."

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Source::Independent.co.uk