DTI rejects rate cap for loans

The imposition of a maximum rate of interest lenders can charge was ruled out yesterday by the government but ministers have left the door open for a possible rethink in future.

The Department of Trade and Industry has been exploring bringing back a legal limit on interest rates as a way of combating loan sharks and unfair credit deals, but yesterday concluded it could cause more problems than it would solve.

Thirty years ago no lender could charge a rate of more than 48%, but this upper limit was scrapped with the introduction of the 1974 Consumer Credit Act.

Several other European countries, however, including France and Germany, impose interest rate caps, as do some American states.

There have been persistent calls from some quarters for Britain to follow suit as part of the shake-up of UK credit laws.

Supporters of a maximum limit argued it would end the more extortionate, but legal, rates imposed by some lenders, particularly those targeting low income groups. Earlier this year a subsidiary of doorstep lender Provident Financial was offering a credit card charging up to 64.9% APR.

But ministers have always been sceptical, and said new DTI research showed that far from helping people, interest rate ceilings could have the effect of limiting low income borrowers' access to credit, and may even push them into the arms of illegal lenders.

The research found the percentage of consumers who admitted having borrowed from unlicensed or illegal lenders was twice as high in Germany and France as in Britain.

The DTI report, however, also dismissed fears that interest rates tend to climb towards the ceiling that has been set. The department said "for now" it had decided not to introduce a ceiling.

The announcement was welcomed by Citizens Advice, which said that extortionate credit "is about much more than the interest rate".