End Legal Loan Sharking
The UK now has one of the highest levels of personal debt in the world - in April this year the British people owed over £1,460bn in private debt. Debt has become part and parcel of everyday life - many of us owe money on a credit card, loan or overdraft. Borrowing money can be beneficial, personally and economically, as is the case with student loans, business loans and mortgages. However, there is a tipping point at which borrowing becomes detrimental to the borrower.
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Irresponsible lending can cause debts to become unmanageable: some loan and credit companies are charging annual interest rates equivalent to over 2500% (despite the Bank of England base rate being just 0.5%). Borrowing at these rates repeatedly tips customers into inescapable cycles of debt and poverty. High debt repayments are linked to rent, council tax and utility arrears, constraints on job seeking behaviour, poor diets, cold homes, and mental and physical health problems. This is legal loan sharking, a national scandal which must be stopped. In response to our growing private debt crisis we believe now is the right moment to adopt the policy of lending rate caps for all consumer credit.
Affordable short term credit is needed more than ever to help make ends meet as people face huge cuts in public services, reduced working hours, stagnant wages, and unemployment. Despite this because millions on lower and middle incomes are not catered for by many High Street banks, they have no choice but to borrow at usury rates. As a result, those most in need often pay the highest rates to obtain credit. Around 3 million people use high cost door to door loans which often charge £83 in interest and collection charges for every £100 borrowed.
Irresponsible high cost lending played a key role in causing the credit crunch, and the ensuing worst economic crisis for over 60 years. Financial institutions are now using the economic crisis as a means to make profit from the most vulnerable in our society.
The government has committed to regulate excessive interest rates on credit and store cards, and yet is paradoxically allowing the much more pernicious practice of legal loan sharking to continue. Government initiatives to date have not worked: The Growth Fund, set up to increase availability of affordable credit to the poorest households, is nearly £100m. In contrast, the OFT estimates that the high cost credit sector is worth £35bn annually. The only way to stamp out legal loan sharking is by establishing a lending rate cap to cover all forms of consumer credit in order to reduce prices in areas of the market that are not price competitive. Importantly, a cap needs to be accompanied by increasing access to more affordable, responsible sources of credit. The government should therefore further develop the idea of a ‘Peoples' Bank' using the Post Office network; ensure greater support for local credit unions, CDFIs, co-operatives and mutuals. Furthermore, all banks should be obliged to provide a universal banking service.
The policy of lending rate caps coupled with increasing access to affordable credit would enable the poorest households to become financially independent, helping to provide a route out of personal debt, encourage saving practices and generate demand for local businesses in our deprived communities. It would also reduce the demand for social and welfare services and therefore relieve pressure on public spending.
The government should therefore take urgent action to put an end to high cost predatory legal loan sharking for good and introduce lending caps to cover all forms of consumer credit. Many countries across the world have shown that such a cap is viable, we need to follow their lead.
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