Will this also apply to bank charges of £30 a day, tacked on to the overdraft so the charges incur charges? There is no meaningful difference between this and an extortionate interest rate.

You really need to define what is an excessive rate of interest or even if there is such a thing which is a lot more difficult than you might think. Obviously if you put an artificial ceiling on something you will reduce the supply of said something. That might not be such a bad outcome but you don’t want people to then fall into the clutches of even more unsavoury illegal lenders. These borrowers have no other options and the ‘ excessive ‘ interest rates are just the market estimation of their risk. Sure they are thieves but they have a captive market and are in effect a monopoly. That is how monopolies price things.

Adam Smith believed in an interest rate ceiling and was not persuaded with Jeremy Bentham’s argument when he wrote the Defense of Usury treatise and sent Smith a copy. Setting up credible alternatives would be a good idea. Do that and you will not need to ban anyone or fix a ceiling. The credible alternative would in effect be the ceiling.

A growing number of backbench MPs believe pawnbrokers and pay day loans must be curbed to avoid Britain becoming a nation ‘in hock to pawnbrokers and legal loan sharks’

Because illegal loan sharks are presumably much nicer?

An obvious question is how can these companies charge so much?

Well they have a captive market because no one else will touch these borrowers with a bargepole and the reason for that is that these people are very bad risks indeed. There will therefore be many more defaults and many of the loans made, (payday loans for instance), are very short term. These factors hugely inflate the cost and so by offering them a cheaper alternative you will lose money.

It would be more sensible to just give them money rather than over regulate the loans system and Tim J’s point is worth noting as well.

The Govt should support credit unions (who will lend to people with poor credit ratings but not at stupid interest rates) so that people can borrow without being screwed by these utterly horrible companies.
Although, and I hate to say it, Labour did have 13 years to do something about legal loan-sharking :/

Great idea, maybe they should also make it illegal to break the law, and we would have no crime.

You really need to define what is an excessive rate of interest or even if there is such a thing which is a lot more difficult than you might think.

Not really, off the top of my head; the Romans had laws against usury, we had them, the US had them until the fed.

Can’t be that hard.

@6 There is a slight side effect with your idea, it means that you have no finance for anything, (yes really, anything at all). People seldom lend money out of the goodness of their hearts, they do so in order to get a return on their money. The amount they charge is usually related to the risk of getting nothing back. Ban ursury and even very low risk lending is pointless as there is no upside.

@7,

Are you really suggesting going back to a period when government regulated the economic relationship between subjects? I had thought the idea of progress was to move forward, not backwards.

More to the point, as Tim says, there is a demand for these loans and legislating will not make that go away. Just give more territory to those nice men who control drugs and prostitution etc already. Because high interests rates are so much better with unregulated threats of violence, forced work in illegal industries etc thrown in.

Perhaps MPs should consider the law of unintended consequences occaisionally. S. Pill suggests a possible positive measure (I don’t know enough about credit unions to say whether I think it would work), and I am sure others are available. But these would not be so newsworthy and make it look like MPs care so much, so they prefer to support a ban.

This is interesting:

“further acknowledges that to £16,000 of excess profit is made every hour from the sector ”

I wonder where that “excess profit” goes then? It certainly doesn’t turn up in the accounts of the companies that do this sort of doorstep lending. They don’t make excessive profits.

No, really, they don’t, they don’t make markedly above average returns on their capital or anything.

That this excess profit doesn’t actually turn up in anyone’s profits might be a clue that those excess profits don’t actually exist:

http://www.nytimes.com/2007/08/28/us/28payday.html

“But alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.”

Ah, so, you see, it’s not “excess profits” that cause the problem for even here, at a non-profit, we’ve those very high interest rates.

It’s simply the high costs of this type of lending: lending for short periods of time in small amounts. There really isn’t a way out of this either.
It’s going to cost £5, £10, £15 or something to make the decision about whether to lend money to someone and that cost has to be recouped out of the loans that are made (that is, you need to get back the cost of all the decision making, including those where the decision was “no”, from those loans you do make).

There really are problems which simply do not have solutions you know.

Are you really suggesting going back to a period when government regulated the economic relationship between subjects? I had thought the idea of progress was to move forward, not backwards.

They do that anyway.

I’m simply pointing out it’s not difficult to establish a rate above which would be deemed usurious, the Romans deemed it around 8%, think that might have been the US rate too.

More to the point, as Tim says, there is a demand for these loans and legislating will not make that go away. Just give more territory to those nice men who control drugs and prostitution etc already. Because high interests rates are so much better with unregulated threats of violence, forced work in illegal industries etc thrown in.

Perhaps MPs should consider the law of unintended consequences occaisionally. S. Pill suggests a possible positive measure (I don’t know enough about credit unions to say whether I think it would work), and I am sure others are available. But these would not be so newsworthy and make it look like MPs care so much, so they prefer to support a ban.

There’s a demand for plenty of things the vast majority consider to be demerit goods, I don’t know that we shouldn’t tolerate wanton usury any more than we should sell pure cocaine at Boots lest additcs be forced into the hands of shady characters.

Either way, allow me to suggest another solution – understand what forces people to seek out these companies and amend it.

@8 Falco: “People seldom lend money out of the goodness of their hearts, they do so in order to get a return on their money.”

I have savings in several pots. I also regard them as loans, because the holder of my savings pays me interest. For my long term loans (eg a cash ISA) I get a reasonable interest rate thanks to a tax benefit; for the short term loans (eg rainy day money in a bank deposit account), I earn a negligible return.

Thus I would be happy to transfer my short term loans to another body that provided an equally modest return and corresponding security/access terms to a deposit account.

EDM 660 proposes: “…provide alternative affordable sources of credit through the Post Office network, local credit unions, CDFIs, co-operatives and mutuals…”

If those sources are so easy to provide, why are they not the direct objectives of the motion? Instead of whinging about expensive credit, which will diminish if cheaper loans are available, why not suggest workable solutions?

7. DisgustedOfTunbridgeWells

You really need to define what is an excessive rate of interest or even if there is such a thing which is a lot more difficult than you might think.

‘ Not really, off the top of my head; the Romans had laws against usury, we had them, the US had them until the fed.

Can’t be that hard. ‘

I am not hostile to the idea, DOTW. However, I am just curious what the ceiling numbers is and how you got to that figure. The government can borrow at around 3% for ten years. This is known as the risk-free rate. It is perfectly rational that the risk-free rate provides a floor because the government as issuer of the currency must be a lower risk than users of the currency. However, the only way I can see you could place an effective price ceiling would be if the government effectively provided the price ceiling.

11. DisgustedOfTunbridgeWells

‘ There’s a demand for plenty of things the vast majority consider to be demerit goods, I don’t know that we shouldn’t tolerate wanton usury any more than we should sell pure cocaine at Boots lest additcs be forced into the hands of shady characters. ‘

Well Harrods used to sell it before the Puritans made a twentieth century comeback.

The EDM is trying to help the poorest from becoming victims of their own ignorance and desperation. With the recession and the forthcoming spending cuts some people will no doubt turn to these loans. Rahter than a ceiling on interest rates which might be difficult to define, these companies (many of whom are not registered in the Uk) should be banned. The credit crunch came about because greedy financiers, backed by irresponsible Governments (Labour interstingly enough – so much for their heritage) only saw the bottom line and profits. Then when the bubble burst the financial institutions went cap in hand to the State to save themselves from bankruptcy.

Ultimately we must learn that if you want something, you will need to save for it. Credit should be restricted. As someone with a debt problem I really do wish there hadn’t been the explosion of advertisements for cheap loans at exoribtant rates because inevitably you will get sucked in when the pennies have run out. Also, the last Government relaxed the rules on gambling, drinking etc. I wonder to what extent these addictions have fuelled the explosion of legal loan sharking?

We nned a society which doesn’t put such a prenium on profit above all esle. Less credit for the poor – and deterrent sentences for criminal loan sharks – might in the end see a reduction in the csots of mental health care and the need for consumer credit advice.

I think the government will inttroduce some form legislation because it is in their own interests tod so – and interestingly enough it might be a vote winner amongst those who don’t traditionally vote Conservative.