The claim is part of a report commissioned by a coalition of civic groups from the New Economics Foundation (NEF) think tank.
The report, entitled Doorstep Robbery, calls for a cap the total cost of borrowing to be introduced for all UK lenders. Alongside it would be a Community Reinvestment Act which would force banks and other credit providers to reinvest a certain proportion of the money they make from lending to a community back into that community.
Commenting on the idea of a usury law, Susan McPhee, head of policy at Citizens Advice Scotland said: “Interest rates and charges are so high that debt just breeds more debt. Our case evidence from across Scotland shows that lenders are more aggressive than ever in reclaiming debts, and this really is driving many people into despair.
“So we welcome the NEF’s contribution to this debate, and we would certainly agree with them on the need for some kind of action that will address these issues and which will offer some protection for the most vulnerable people in our society.”
While the idea of a usury law may seem radical in the context of Scotland and the UK in 2009, the UK did once have such a law which banned interest rates above 10% for almost 300 years until 1854. In fact, interest rate caps exist in many European countries, including France, Austria, Germany, Italy and Switzerland, as well as in many states of the United States.
Indeed, in France interest rates are reviewed quarterly by Banque de France and at present, according to the report, are set at 7-8% on loans of more than ¤1,500 and 20-25% for loans of less than ¤1,500. In comparison, interest rates charged by doorstep and payday loan companies in the UK are typically more than 1000%.
At the launch of the report last week, politicians from all parties committed to considering a curb of exorbitant lending costs, while Liberal Democrat Treasury spokesman Vince Cable said he would push for the report’s proposals to be incorporated into his party’s manifesto at next year’s general election.
Dave Thompson, SNP MSP for Highlands and Islands, who last year called for interest rates to be capped, welcomed the report.
He said: “This report is a welcome look into the UK lending industry. It has now been more than a year since I took this issue up and called for a legal cap on the level of interest that lenders are allowed to charge.
“This report also highlights the shocking flaws in the evidence used to oppose a cap on interest rates by the UK Government.
“It calls into question the approach and transparency of the research that was conducted as well as the lack of solid evidence for its conclusions.”
“I echo this report’s calls for the introduction of a cap on interest levels charged and the overwhelming need for new, transparent and representative research on appropriate interest levels and the true effect they would have on those who would have to pay them.”
Crucially, the report’s author, Veronika Thiel, told the Sunday Herald the cap should be applied on a total cost of credit (TCC) basis, rather than APR as the former is more reflective of actual borrowing costs.
“APRs are confusing and can be misleading. What we want is a total cost of credit cap which would mean that if you borrow £100, you can only pay back £120, no matter what.
“So the cost of the credit can not be more than £20.”
In simple terms, it would cap the total sum that could be repaid on a loan, regardless of how long the loan was granted for, expressed as a proportion of the sum borrowed.
Although the reports itself says more research was needed before the exact level of a cap could be decided, the civil groups for whom the report was written are campaigning for a cap at 20%.
Thiel also believes that such a TCC capping law is all the more vital following last week’s Supreme Court ruling on bank charges.
“You could definitely argue now with the Supreme Court case that the banks should most definitely be more taken into account here.
“That is why I am for a total cost of credit rather than an interest rate because a total cost of credit will incorporate those kind of costs,” said Ms Thiel.
As reported in the Sunday Herald in July, Lloyds TSB Scotland imposes fees of up to £215 a month on customers who are £101 overdrawn for just 10 days, but this cost does not have to be incorporated into the APR of 19.3% advertised for unauthorised borrowing.
If the law was changed as NEF proposes, then Lloyds would be forced to included the fees in its TCC, which would be capped.
The reason most often cited by providers for the high borrowing costs imposed on low-income borrowers is the greater risk of default. Thiel’s report disputes this, citing the low default rates of credit unions in both the UK and USA and says that more research into the risk models used by subprime lenders (payday loan companies and doorstep lenders) is needed.
If the report’s proposals were taken up, it could mean a boost for credit unions as a similar community reinvestment law already in existence in the United States has led to banks funding credit unions and other social lenders in order to meet their statutory obligation to invest back into the communities they make money from.
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