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!