New report proposes Government action to restrict exorbitant moneylending costs
Strict controls on the rate of interest charged by licensed moneylenders is proposed in a new study launched today (Wednesday Nov. 14th, 2018).
The Report “Interest Rate Restrictions on Credit for Low-income Borrowers”carried outby UCC and funded by the Social Finance Foundation and the Central Bank of Ireland, reveals interest rates of up to 187%, and APRs (annual percentage rates) of up to 287% whencollection charges are included.
According to Central Bank figures, an estimated330,000 people are customers of moneylending firms. One of the largest categories are ‘home credit companies’ which charge APRs of up to 287%. Another large grouping, catalogue companies, charge lower but still very high interest rates between 43-72%.
The interest and charges are legal under legislation dating back to 1995.
A majority of customers of moneylending firms are female, drawn from lower socio-economic backgrounds and aged between 35 and 54 years. Typical home credit loans, also known as doorstep loans, cover costs like back-to-school, Christmas or emergency household spending.
The report urges the Government “to adopt a policy that prohibits usurious rates of interest in the interests offairness to the most vulnerable in Irish society by the introduction of a restriction oninterest rates and charges”
It points out that “Globally, interest rate restrictions are more prevalent in both developed and developing countries in recent years. In Europe, there has been a clear use of interest rate restrictions as a policy tool to control high-cost credit. Today, 21 of the EU 28 member states now have some form of interest rate cap on high-cost credit.” Ironically, Ireland is included in the 21 due to the interest rate cap of 1% per month on credit union lending.
Examples of such restrictions include a ceiling of a maximum of 12 percentage points over average rates in Germany, while inItaly lenders are limited to charging no more than 50% over the average market price.
The report identifies that a majority of customers of moneylending firms become accustomed to ‘ease of availability’ and ‘convenience’ of home collection by moneylending firms. It points, however, to a UK study where “52% of home credit users believed that using this form of credit had trapped them into a cycle of borrowing.”
An alarming finding was that in 2013, it was found that almost a quarter of customers in Ireland were offered additional credit beforeclearing an existing loan.
The report points specifically to a finding in June 2015bythe Financial Services Ombudsman Bureau (Ombudsman) that two borrowers in Donegal had been sold top-up loans by a licensed moneylender, who thendeducted amounts from the new loans to repay an existingloan.
The report proposes the introduction of interest rate restrictions linked to the promotion of alternative loan options and services for those currently using high-cost credit options.
The report suggests that credit unions represent such a viable alternative to high-cost credit providers.
It specifically references the new Personal Microcredit scheme with a maximum APR of 12.7%, providing loans of between €100 and €2,000. Almost half the country’s credit unions have joined the scheme since its pilot completed in 2016.
To date, thousands of these loans have been issued with typical repayment savings of €130 on a €500 loan. See www.itmakessenseloan.ie
Welcoming publication of the report, Brendan Whelan, CEO of Social Finance Foundation said “in an era of extremely low interest rates and 0% PCP car finance, such charges are unacceptable. The overall remit of policy, legislation and regulation should be to widen existing alternatives such as credit unions and the Personal Microcredit Scheme.”
Credit unions are well placed to deliver this alternative, he said. “In 2016, credit unions in Ireland issued over 113,000 loans of less than €500 and more than 284,000 loans of between €500 and €2,000 in value.
”In this context the study’s recommendation for enhanced protection for Irish consumers and embedding of greater financial inclusion in policy and financial service provision, to include initiatives around financial education, is also of vital importanceBrendan WhelanChief Executive Officer, SFF
The Report makes eight recommendations, of which the three key ones are:
- Government to adopt a policy that prohibits usurious rates of interest in the interests offairness to the most vulnerable in Irish society by the introduction of a restriction oninterest rates and charges.
- Such a policy to be conditional on the credit union movement in Ireland committing to andbeing enabled to serve the community currently serviced by the moneylending firms, subject always to adherence to prudent credit guidelines.
- In consultation with the credit union sector, the Department of Finance considerincreasing the 1% monthly cap on interest rates for credit unions as per Section 38 (1)(a) of the Credit Union Act, 1997, for this type of lending to cater for the significantly greatercosts associated with such small lending.
The full report “Interest Rate Restrictions on Credit for Low-income Borrowers”may be accessed here: https://sff.ie/irr/
Note to Editor
Social Finance Foundation (SFF) is a wholesale lender of social finance, providing finance to Social Lending Organisations so that they in turn can lend to community development/community sports organisations and social enterprises. The Social Lending Organisations which SFF provides funding to are currently Clann Credo and Community Finance Ireland.
SFF also has a subsidiary company, Microfinance Ireland, which lends to micro-enterprises, both start-ups and existing enterprises.
SFF also leads initiatives where finance can be used for social good. It is currently working on the Personal MicroCredit initiative. It has also partnered with the Department of Rural and Community Development on the development of a national policy on social enterprise.