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[ 2010-06-15 ]

OFT won’t stop 2,000 per cent loans
By James Charles, Personal Fiannce Reporter
London (UK) – 15 June 2010 – The Times - Low-income
borrowers who face interest rates of up to 2,000 per cent
from door-step lenders and payday loan companies would not
benefit from new legislation to control the price of
short-term credit, the Office of Fair Trading (OFT) has
concluded.

In a review published today into the £7.8 billion sector,
which also includes pawn brokers and rent-to-buy lenders,
the OFT warned that price controls on interest rates would
lead to companies recouping lost revenue in higher fees and
charges.

It began the review after concerns were raised over the huge
interest rates levied on borrowers who are dependent on
short-term credit after being shut out of the market for
loans from high street banks and building societies because
they are on a low income or have a poor credit history.

The City watchdog said that the market successfully serves
people who cannot get credit elsewhere and the high prices
charged by these lenders reflected the higher administration
costs, such as door-to-door collection and increased levels
of missed payments.

The review has recommended that borrowers of short-term
loans should be able to build up a credit history of
repayments, boosting their chances of securing credit from
mainstream banks and building societies in the future. It
also argued that price comparison websites should list
details of payday loans and rates from door-step sellers to
improve borrowers ability to shop around for the best rate.


However, it also suggested that the Government should
intervene if it wanted to address wider issues fuelling the
market.

The report found that there was less incentive for rival
high-cost lenders to compete because of limited financial
understanding amongst typical low-income borrowers,
including a lack of awareness of the total cost of the
loans.

Ray Watson, OFT Director of the Credit Group said: “People
who use high-cost credit have limited options and find it
difficult to exercise what choice they have to obtain the
best deal. This means that competition between suppliers is
less effective than it might be.

“The recommendations we’re making today would deliver
worthwhile improvements to these markets but more radical
approaches, outside the remit of the OFT, need to be
examined by the Government if the fundamental and
longstanding issues of lack of consumer power and limited
supply are to be tackled.”

Marie Burton, financial services expert at Consumer Focus,
said: “It is a cruel irony that people who are already
struggling financially have to pay so much to borrow money.
Unless more affordable credit is available, simply clamping
down on high cost lenders will not provide the answer
because it may push people to riskier borrowing from loan
sharks.

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