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Yes, total cost of credit information is a good way forward—although, ironically, that would please a lot of payday lenders because, relatively speaking, they would not look quite so bad.
This is not only about interest rates; it is also about ensuring that credit is eventually paid down, and about behavioural charges, which can be difficult to pin down under the annual percentage rate as they apply to some consumers, but not others. An APR cap on its own might seem like a panacea, but, as Members on both sides of the House realise, it is not. Unfortunately, there are ways around caps. The experience of some states in the United States where there has been a 30% cap on payday loans is that the rent-to-own sector gets a great boost, because money can be made in another way: by whacking up the base price of the goods.
If there is to be a cap—and I think there can be a place for a cap—we must talk about what sort of cap it will be. I have always argued that a blunt general cap is a bad idea, because it can only be set either so high as to make no difference or so low as to put some parts of the market out of existence entirely and thereby run the risk of driving more people into the unlicensed part of the market, where someone’s idea of a late payment penalty is a cigarette burn to the forearm.
Some people say, “Well, let’s go for a product-specific cap”, under which there would be a different cap for payday loans, home credit and so forth. That is sensible in some respects, as it acknowledges the fundamental cost drivers in the market, such as that it costs more to make a short-term loan, that it costs more in percentage terms to make a small loan, and that it costs more to loan to riskier customers. The danger is that we then get cliff edges, however, and all sorts of distortions in the market, with operators shifting around between different categories in search of the most favourable regime.
My preference is to have a more flexible type of cap that is, in fact, more like a curve, and which can operate effectively in all parts of the market without putting any of them entirely out of business. I discussed one version of that in a debate instigated by Stella Creasy in February 2011. I called it a twin-cap approach, with a cap on interest rates—30%, perhaps—and also an arrangement fee cap, perhaps of 15%. Under such a regime, it would be possible to make money in very short-term loans—what we today call payday loans—but only in a responsible manner and at a decent level, and where operators were making longer term loans, the amounts they would be able to charge would fall.