Debt Solicitors

by Dharmista Maisuria

Moneysupermarket.com recently revealed the total level of personal debt in the UK amounts to more than £1,460 billion. Meanwhile, the Office of Fair Trading has estimated that over £16,000 an hour is generated as profit by the high interest rates lending sector.

Debt Campaigners View

Compass, the group that campaigns for the end to legal loan sharking states: "lenders can charge any price for credit, which means some companies charge £82 for every £100 lent. Annual interest rate charges of over 2,500% are now also common." The Compass campaign is calling for "a lending rate cap to cover all forms of consumer credit, to reduce prices in areas of the market that are not price-competitive."

In light of the above, the government has announced they are considering a cap on interest rates. They argue that this will assist consumers to free themselves from "inescapable cycles of debt and poverty."

A Banker’s Opinion

Duncan Lewis presented the above information to an investment banker from a prestigious investment bank based in Canary Wharf. He attempted to rationalise the situation by explaining that “there is evidently some room for putting a 'ceiling' over some practices carried out by various lending organisations. However, those suggesting interest caps of 10% above base rate appear to have little experience of the inner workings within business and banking sector. A cap on interest rates would quite literally mean most people who sign up to the above mentioned loans would not be able to obtain credit, as they would simply not prove to be a viable risk. In simple terms, lenders will not lend to high risk borrowers at such low rates. The question is, why would the government expect them to do so? If this proposal was implemented the economy would be almost certainly be pushed towards instability." He went on to elaborate that “many people who have little need to borrow money fail to consider borrowing as a feasible method to climb out of poverty.”

Predicament of a Client in financial difficulty:
Duncan Lewis also asked a client with substantial debts to opine on the figures presented by the campaign and the Office of Fair Trading.

Our client informed us he had a well paid job however he was recently made redundant, and had since been trying to live off his savings whilst looking for work. He was unable to secure a job and his savings ran out. He only turned to the state as a very last resort, explaining that before he did so he tried everything else he could to keep his head above water. He felt in theory it would be a good idea to cap interest rates, however he feared that if he was not able to capitalise on the credit opportunities which were available to him from banks or other mainstream lending sources, he would have been driven to borrowing from unlicensed lenders who have criminal backgrounds who could use physical violence for non-payment.

Our client summed up: "People need to borrow money. If legitimate lenders are capped people will have to use loan sharks and that would fuel a source of criminal activity which is already present in the community - the thugs have no cap on their interest rates. I have heard stories where the interest rate goes up if one payment is missed or is late."

Conclusion

From assessment of this information it would appear that introducing methods to implement ceilings on interest rates appears to be largely a justifiable action. Unquestionably, the intention of the proposed action is to help consumers and people in difficult financial situations. Yet no matter how well intended the proposal may be it can also be seen that a cap on interest rates may hinder the cause and prove to be little or no help to people facing financial difficulties.

The OFT review found that:
• Many consumers are unaware of the options open to them and advice is limited.

• Consumers tend to focus on how quickly and easily they can access credit and the affordability of the repayments, rather than the total cost compared to other products.

• There have been few significant recent entrants to these markets: competition on price is mostly absent in some high-cost credit markets and some of the providers appear to be earning high profits.

It is difficult to see how the above can be remedied via a cap on interest rates. In fact it can be determined that a cap would merely serve to stifle competition between lenders. What may be required is compulsory financial advice when obtaining credit - an explanation of other options available, further clarity and transparency, and government encouragement or incentives for greater competition between lenders.