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MONEY COMMENT
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I was a bit shocked to read on our Dealing with Debt discussion board the other day of a company that charged an eye-watering annual interest rate of 1,734%. No, that's not a misprint. I'm being serious. The APR on a loan from this company is 1,734%. The Payday Loan Company lends small amounts of money to people who can't manage until their next wage packet. You can borrow up a maximum of £400 over 28 days, on condition that the moment you get paid, you repay the loan. However, you can renew the loan from month to month, as long as you pay the interest every payday. A couple of years ago, the Government announced that it intended to crack down on credit companies that charge extortionate rates of interest as part of their review of the 1974 Consumer Credit Act and it published details for consultation earlier this year. This consulation paper was based on a report about extortionate credit published in 1999 which pointed out that a major problem is that there isn't really a proper legal definition of what 'extortionate' means. Section 138 of the Act helpfully describes a credit arrangement as extortionate if it requires the debtor to make payments which are 'grossly exorbitant'. What does that mean, for goodness' sake? The government wants to replace that definition with the word 'unfair'. It also wants to allow consumers to fast-track complaints about extortionate loans through an Ombudsman-style body that will be able to consider disputes about agreement terms instead of people having to go to court. Consumer bodies will also be able to take class action against companies on behalf of borrowers. The Payday Loan Company is perfectly within its rights to charge an APR of 1,734%. It's licensed by the Office of Fair Trading and there is certainly a market for small, short-term loans which mainstream lenders aren't prepared to countenance. And it's true that their target market is a very risky one and that their administration costs are probably just as much for small loans as they are for larger ones. They have to make their money somehow. But it'll be interesting to see if it, and companies like it, lowers its rates once the definition of 'extortionate' becomes clearer. A White Paper on the subject is expected in the autumn. More: Get out of Debt