Olive McCarthy is an active member of St. Michael's Credit Union, Cork, Ireland. She receives research funding from a wide array of external sources, including government bodies, NGOs and sectoral organisations. She is a member of the Credit Union Advisory Committee, appointed by the Irish Minister for Finance.
The cost of accessing small personal loans can be eye-wateringly high for those who need it most. Take the UK, where a £200 loan from Provident Personal Credit over 13 weeks costs £86 in interest. That’s an equivalent APR of a whopping 1,557.7%.
These offers are available even after the caps on payday loans that the UK introduced five years ago. In the months after the reforms, the Financial Conduct Authority (FCA) reported that the number of loans and the overall amount borrowed was down 35%. From there, the decrease continued: there were 5.4 million high-cost loans totalling £1.3 billion in 2018 with the total amount repayable at £2.1 billion; five years earlier, there had been 10.3 million loans worth £2.5 billion.
Yet clearly, high-cost credit has not gone away entirely, and it looks set to get bigger again. Provident, the UK and Ireland’s largest high-cost doorstep credit provider, is anticipating increased demand when unemployment rises as the UK furlough scheme winds down. The lender has reportedly put aside £240 million for a surge in defaults.
So, what have we learned since the rules changed, and will those who need credit be able to access it in the wake of the pandemic?
To cap or not to cap?
High interest rates are usually justified by the argument that the borrowers are more likely to default, often having been turned down elsewhere. Higher rates compensate the lender for higher risk.
People often borrow on the basis of convenience and whether they can afford the repayments, rather than the cost of the loan. This can lead to financial strain, repeat borrowing and defaults. After all, credit is debt.
Nonetheless, the debate continues among policy experts worldwide about whether caps are the best response. Supporters point out that restrictions have reduced the cost of credit for low-income borrowers, tackled over-indebtedness and helped to prevent people from being exploited.
Some consumers may no longer have access to credit because of providers changing their business models or exiting the market, but many of these people would probably not pass a rigorous affordability check and may be over-indebted already.
Opponents highlight the possible unintended consequences. As well as less access to credit, they worry about the potential for more illegal moneylenders, and loans companies introducing charges that circumvent the restrictions.
Swayed by these arguments, Ireland is among a minority of European countries to favour increasing regulation and supervision over caps. For example, high-cost warnings in loans advertising became a requirement from September 1. Although the government
Talking Credit Unions with Chris Smith is a regular podcast dedicated to informing credit union practitioners, leaders and opinion formers on variety of industry topics. To contact Chris Smith, firstname.lastname@example.org