The Case for an Interest Rate Cap
Debt on our Doorstep calls on the Government to introduce a form of statutory price control - an interest rate cap - in the sub-prime lending market. This is a feature of many other regulatory systems in Europe and in many individual states in the U.S.
Our main arguments for a cap are focused on the fact that the lending market in the U.K is segregated. In the mainstream market loans are priced competitively, and information about the risk presented by borrowers is shared between lenders (via credit reference agencies). This makes it easy for consumers to switch to a better deal and lenders have to compete on price terms. Witness the explosion in credit cards offering 0% balance transfers and the currently low rates of personal loans.
But there is another market for credit in the U.K. This is the market in which low income consumers are forced to borrow, and which is characterised by a lack of price competition - where the speed of the loan offer, and the lack of opportunity to switch lenders (due to a lack of shared information on borrower repayment histories), allows lenders to hike up interest charges beyond those that would fairly reflect risk. It includes door to door lending, high street "alternatives" such as Brighthouse, mail order, cheque cashing agencies, pawnbrokers etc.
Debt on our Doorstep doesn't present the case for a cap in order to put lenders out of business, or to limit the amount of lending to people on low incomes, however. That is not our intention. Instead, we want to see a fair price for credit charged - one that genuinely reflects the risk to the lender and the costs of making the loan. But without a cap that reflects these genuine costs, borrowers in the sub-prime market will always fall prey to exploitative lending.
The Government has now ruled out a cap on interest rates, although it has promised that it will keep the matter 'under review', after allowing adequate time for the measures introduced in the recent Consumer Credit Act 2006, to be evaluated.
