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My colleague Maurice Glasman has written an article for the Guardian’s Comment is Free on behalf of London Citizens about the new anti-usury campaign that is trying to stop lending at irresponsible interest rates:
“Following the financial crash of last year, a new issue emerged and a new campaign was forged. Our members experienced an increase in interest rates on money loans. The banks, many of which were now owned in substantial part by the public, were borrowing at half a percent but lending the money back to us at 40 times that rate, and more. Each of the major banks have credit card interest rates that start in the 20s and rise steeply with penalties. The same is true of consumption and mortgage loans when penalty payments see the rates jump into the 40s and 50s – more than a hundred times the interest charged to the banks. This is setting aside the bridging and pay-day loans sold by companies such as Shopacheck and Providential, where the interest rates start in the hundreds and go their own way from there. The cost of not earning enough to live has never been higher.“
Some of the commentators on Maurice’s piece have a point when they argue that bank lending needs to reflect the risk involved in giving out the loan. Some higher risk loans might be useful and necessarily have a higher interest rate.
But Maurice is definitely onto something here. If you look at payday loan companies in particular (take for instance Wonga.com which states on its website a Typical 2689% APR!) you can easily see that these exorbitant interest rates are not in place to cover risk but to make money on the back of poor people’s plight!
Why? If the risk of non-repayment was so high that you had to charge this kind of interest rate it is immoral (and it should be illegal!) to give out a loan in the first place. In this case, the likelihood of people spiraling deeper and deeper into debt is much higher than them paying the money back!
So the borderline between responsible lending including interest rate variations reflecting real risks and usury is undefined, which really shouldn’t be the case. So, London Citizens are absolutely right in addressing this issue!
Debt can cause personal tragedy (just read the recent news about jailed loan sharks) and there need to be more strictly defined rules to prevent vulnerable people from being exploited!
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We have the same greed-driven system here in the States. Ever wonder why credit card companies are incorporated in South Dakota? No usury law. Under federal law, that means they can “import” that into any state in which they operate.
As to payday loans, as an Army JAG I helped fight these lenders in Oklahoma, which finally listened to the soldiers who were being bilked by these leeches, and forced not only transparent discclosures (annualized APR, true cost of credit) but capped the effective APR at a reasonable amount. Oddly enough, they are still in business, belying their “need” to offset perceived risk with higher interest.
At some point, the balancing of risk vs. reward must, itself, be balanced with the societal danger of overextending credit. If the borrower is such a poor credit risk that 30% seems “fair,” perhaps society at large is best served by simply not extending credit to him. Otherwise, we fuel the consumption and extinction cycle we’re currently “enjoying.”
Stuart, you are absolutely right! Giving out credit at any interest rate assumes that credit is always good. Indeed, people need to realise that saving is always better than easy debt.
Some of the victims of the loan sharks the blog refers to borrowed only a few hundred Pounds for furniture and ended up with massive debt, rapes and other physical and psychological violence because they couldn’t repay!
People need to be better educated and these sort of businesses need to be closed down!
This is a very important topic about which I haven’t thought yet in this way. These loan sharks are really a menace to society! Time support London Citizens or even make the campaign European!
Outlawing these practices should be a key task for the incoming European Commission!
Outlaw ALL interest. Get all the bankers off the dole and back into meaningful labor doing something productive for society, instead of destroying it.