Two sides of the coin with cheap money

ACCORDING to a poll published at the weekend, nearly seven out of 10 people in the UK would like to see the Government impose a cap on the interest rates which credit companies are allowed to charge.

The campaign group Compass said that its survey of more than 2,000 people proved there was public support for tight controls on all forms of credit, including pawnbroking and so-called “payday loans”, in addition to plans already announced to cap rates on credit and store cards.

Separate research published earlier this month by the Consumer Focus watchdog group found that around 1.2million people have used a short-term loan at least once in the past year to cover their costs until the next pay day.

The average loan value was around �1,000, and some providers have been condemned for imposing interest charges equivalent to an Annual Percentage Rate of more than 2,500%.

Compass claimed at the weekend that some current credt arrangements amounted to “legal loan sharking” and accused the unsecured credit sector if causing “misery for thousands”.

Misery there certainly is, but there is another side to the story.

Had the same people interviewed for the survey been asked whether they would like to see tougher restrictions on the availability of credit, as well as on the interest rates charged, the chances are that most of them would have replied in the negative.

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Certainly, the millions of people who regularly use short-term credit, whether in the form of store cards, payday loans or a pawnbroker, would not wish to see such restrictions introduced.

And yet commercial reality dictates that we cannot have it both ways.

If regulated lenders are prevented from charging a rate which covers the administrative cost of managing a loan and offers a commercially attractive return in relation to the risk involved then they will stop lending.

This runs the risk of the market being left still more open to the “sharks” operating beneath the radar of the regulatory authorities, resulting in still greater misery for those sufficiently desparate to resort to borrowing of this nature.

While it might be appropriate for the Government to impose an absolute cap on the rate charged on each type of loan, rather than just store and credit cards, it would be a mistake for these rates to be set so low as to make any substantial difference to current lending practices.

The level of consumer debt (together with corporate debt and government debt) was a major factor in the circumstances which led to the recent recession.

We should stop regard the availability of cheap credit as some sort of human right.