No Cap on High Interest Rates for Payday Loans

High cost credit options like payday loans do not need a cap on their interest fees according to an investigation by the Office of Fair Trading (OFT).

The investigation into the sector, which lent around £7.5billion in 2008, was launched after it was revealed that companies offering high interest credit options like payday loans, doorstep lending and rent-to-buy deals were charging up to 2000% on loans and targeting the poorest families.

However, the investigation by the OFT has concluded that the loans “work reasonably well in that they serve borrowers not catered for by mainstream suppliers, complaint levels are low, and there is evidence that for some products, lenders do not levy charges on customers who miss payments or make payments late."”.

The short term loans and other credit options are often taken out by people who are on low incomes and are limited in their credit options with mainstream banks and building societies.

The review concluded that their recommendations are limited in the difference that they can make and called on the government to further investigate the implications of the sector.

The OFT said: “More radical approaches which are beyond the OFT's remit would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist."

The OFT found that many high-cost borrowers were unaware of the options that they could take advantage of and the main reasons for taking out credit with high interest rates were to get credit as quickly as possible and if they could afford the repayments. Customers were unlikely to compare the total cost of their credit when compared to other lenders.

The report also highlighted the fact that there were some reasons why the interest rates were so high in some circumstances. Administration costs were high and the cost for agents to visit the homes of customers to collect repayments also added up. The level of missed repayments was also high which incurred more fees for customers.

The OFT say that imposing formal price restrictions would be hard to enforce and could lead to lenders being forced to restrict their lending, or stop it completely which would further reduce the credit options available to customers.