Most would say “I’ll lend you £20 if you repay and buy me a (£3) pint next week” is pretty fair. Yet if I (correctly) described it as a 140,000% annual rate loan would you still agree?
Interest rates are a blunt tool, which is why when people say “2,300% APR payday loans should be banned”, I’m not convinced (see Should we worry more about 10% interest than 2,000% APR), as the cost depends on the borrowing length as much as the rate. Shorter loans are far cheaper (see the interest rate guide for a full explanation).
If we make legal lending totally unprofitable, we run the risk of pushing the 1.5m people with payday loans to illegal loan sharks, who at worst even threaten to rape people’s children if they don’t repay.
That’s why I want to doff m’hat to backbench labour MP Stella Creasy, this week she put in a Ten Minute Rule bill to parliament to discuss three things… (watch it here Payday lender TMR Bill video).
- Cap the loan cost, not the interest rate. I think this is a better tool. The problem with payday loans is less the rate, and more the fact they keep rolling over the debt so you’re in it for a long time, meaning the costs ride high (and the fact there’s very limited competition). Capping overall cost is a good measure to help limit this.
- Levy these companies to help debt advisors. I am already very worried about the future funding of Citizens Advice (it’s a charity, though many don’t realise it) as some of the money it gets from the Government is under threat. So to add a levy on these companies to fund the charity debt advice sector seems relatively sensible.
- Allow credit unions to operate via Post Offices. Credit unions are mutual savings and loan co-operatives (see credit union guide). The problem with them is they only operate in certain areas and have limited resources for branch type access. So the idea of allowing them backroom integration with Post Offices to allow better access is a good one.
All this seems pretty sensible to me. I’d chatted to the MP about it the day before (she even used m’beer example in the speech) and think it’s well thought through. While I don’t agree with every dotted i or crossed t, I think conceptually she’s onto something good.
Thankfully the bill passed through unanimously and it’s gone on to the 2nd reading stage. The truth is, a Ten min rule bill has little chance getting on the statute books, yet this comes at the same time as the government are looking at similar issues with credit and store cards. My hope is party politics won’t block letting them all work together and getting something done.
PS. Naughty of me to write this. Yet if you watch the video all the way through you’ll be rewarded with glimpses of her, as a new MP, getting a wee bit confused a couple of times about when to stand and sit.