Business

Call for cap on high-cost credit

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Image caption Family finances are being stretched during tough economic times

MPs have been debating the merits of caps on the "eye-watering" interest rates charged for high-cost credit.

Labour's Stella Creasy called on ministers to help stop the "spiralling costs" faced by people who needed to borrow money on a short-term basis.

She said that in some cases, interest was the equivalent of 10,000%.

But a spokesman for the industry said a system of capping interest would lead to confusion and would be to the detriment of the consumer.

Ms Creasy said more and more High Streets had shops offering short-term loans, higher purchase agreements and credit deals.

"It is a badge of poverty," she told a backbench debate in the Commons.

Debt cycle

Various MPs and campaigners have pointed out that the big risk with payday loans - as with other forms of credit - is getting into a spiral of debt because the funds are not available to repay the advance.

Liberal Democrat Duncan Hames said high-cost credit could provide a "useful bridge" but too many people became "caught up in vicious cycles of debt, trapped by unscrupulous and irresponsible lending".

Jackie Doyle-Price backed an amendment to the motion which would urge regulators to consider imposing caps, rather than compelling them to do so.

"We have seen credit providers have been very innovative at finding their way around regulatory obligations," she said.

Conservative Robin Walker, whose amendment urging regulators to consider imposing caps was backed by MPs, said he "felt uncomfortable" in supporting new regulations at this time.

"Many of my colleagues on this side of the House are allergic to increasing regulation and all of us would like to see better rather than more regulation accepted as a general principle of government," he said.

'Rash'

Junior business minister Ed Davey said the government was in "listening mode" and had not reached final conclusions on the issue, not least because one consultation about the cost of lending was still open.

"Nothing has been decided and it would be irresponsible for me to stand here today and pre-empt their results," he said.

"We are not afraid of taking action where the evidence justifies doing so. We will not hesitate to act where there is evidence of consumer detriment or where the evidence shows consumers are being exploited."

He added that Ms Creasy's call for caps on the total cost of lending appeared sensible at first glance.

"Yet despite what she said, the evidence base of her new approach is limited, to say the very least. What seems sensible at first glance could have huge unintended consequences for those who we are trying to help," he said.

"Without a proper assessment of the evidence, it would be rash and frankly negligent to rush into this proposal."

Earlier, John Lamidey, of the Consumer Finance Association trade body, told the BBC that a system of caps would be self-defeating, as the market would shift to those types of loans that were not capped.

"If you start capping individual products, there would be a lot of confusion and complexity, and more consumer detriment," he said.

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