Monday, 15 January 2007

Interest rate caps back on the agenda around the world

The Irish debate on interest rate caps (see report dated 10th January 2007, on this site) is being repeated across the globe.

In the U.S, The Miami Herald (2nd January) reports on proposals to cap payday lending rates, and the inclusion of a cap at 36% for payday lending to the U.S military:

"Payday loans are marketed as short-term cash advances on the borrower's next paycheck. But previous research has found that the industry depends on repeat business or ''flipped'' loans. In fact, 90 cents of every dollar payday lenders make comes from borrowers who flip into loan renewals five or more times per year. The new report finds the average payday borrower pays back $793 for a $325 loan!

Some states don't allow the practice. They are Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia. All hold their lenders to consumer loan laws, which usually include a double-digit interest rate cap.

Congress recently adopted this approach when the Pentagon sought protections for troops from payday lenders. The Defense Authorization bill President Bush signed in September included a 36-percent interest rate cap on such loans to military families."

Last year Japan voted to tighten the level of its interest rate cap from 29% to 20% to take effect from 2009 and Poland implemented a cap at approx 23%. And this year, Queensland in Australia is considering the introduction of a 48% cap, following the example of New South Wales.

An excellent presentation was given to the recent seminar on regulating high cost credit held by the Griffiths University in Australia by Melanie Spong from the Office of Fair Trading in New South Wales on the history and effects of rate caps. Her evidence revealed that high cost lending in Australia is due to market failure. Rate caps can stimulate markets effectively so that poor customers can get credit at reasonable rates. The speech also reports information about fringe lending in Australia, its lack of advice, and its clients who are often trapped into taking out revolving debt with no hope of ever repaying it.

Yet Provident in their response to the RTE programme in Ireland state:

"Virtually all informed share the UK Government's view that interest rate ceilings would harm the very people they would be designed to help."

Of course, Provident also said that their products were competitively priced but after an 18 month inquiry it was found that the industry was making excessive profits of at least £75 million per year and possibly substantially more. Draw your own conclusions.

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