No cap for lending rates

The government will not impose a limit on the level of interest lenders can charge consumers, it announced today.

The Department of Trade and Industry said research had shown that imposing an interest rate ceiling had a negative effect on low-income borrowers.



It said lenders in countries which imposed a cap tended not to offer small loans repayable over a short period, forcing people on low incomes to either borrow more than they needed or turn to illegal loan sharks.



The DTI carried out research looking at the impact of capping the amount of interest that could be charged at both 36% and 200%, and studying countries such as France, Germany and the USA which imposed a limit.

But it found that the ceiling, which is intended to protect people on low incomes who cannot shop around for the best rate, actually had a negative effect on them.

The research found that lenders did not offer small loans which could be repaid quickly, such as those offered by door-to-door lenders who will lend sums under ?50, or the services offered by cheque cashers.



This led to the choice of products being reduced, limiting competition in the market, as well as forcing people to borrow more than they needed or turn to alternative sources of credit.

It found that the percentage of people in France and Germany who admitted they had borrowed money from unlicensed or illegal lenders was twice as high as in the UK.



Some low-income consumers also took out products that had extra charges that were not included in the interest rate calculation, but which they were likely to incur, such as penalties for late payment.

Even in Ireland, where at 200% the ceiling is set at a higher level than the other countries looked at, lenders did not offer the same range of small, short-term loans as were available in the UK.

The move, which the DTI said it would keep under review, was part of the government's review of the UK's 30-year-old consumer credit laws.

Other reforms include cracking down on illegal loan sharks and enabling people to take disputes about credit agreements to the Financial Ombudsman Service, rather than having to go through the courts.



Consumer minister Gerry Sutcliffe said: "The UK's credit market is very sophisticated and we are currently undertaking a wide range of reforms to ensure protection and transparency for consumers and the industry.



"These reforms, rather than an interest rate ceiling, provide a better way to deal with problems in the market now, such as the high cost of credit and financial exclusion."

Citizens Advice welcomed the government's decision.

Its director of policy, Teresa Perchard, said: "Our evidence is that extortionate credit is about much more than the interest rate - high pressure selling, unfair terms and conditions, hefty charges for letters and statements, expensive add-ons like insurance can all hide behind an interest rate.



"We therefore very much support the DTI's proposals for a new and more accessible means of challenging unfair credit deals by taking them to an independent ombudsman."

Philip Cullum, deputy chief executive of the National Consumer Council, said: "The DTI's research demonstrates that a cap on interest rates is not the most effective way of protecting low-income consumers. Indeed, it may be positively damaging.



"But far from being a reason for inaction, today's research report strengthens the case for industry and government to work together to stimulate the market for low-income credit and prompt more responsible lending.



"As things stand in the UK, very few credit products meet the needs of low-income consumers, and lack of competition means there is little incentive for lenders to find more cost effective ways of meeting consumers' needs."