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Compass payday loan interest cap proposal

22nd September 2010 Print

Stephen Jones, money reporter says "It is encouraging that Compass have brought payday loans into the spotlight and highlighted the need for change.

However, while the intentions are good, we are concerned some MPs have made a political decision to pick up something that has been on the news agenda and have failed to identify the real issue, which we believe is  the  lack of transparency around additional fees and costs.

In truth, there's little evidence to show that a rate cap would work, and a knee-jerk reaction may just push cost of borrowing up further (through bolt-on-fees) or force many lenders out of the market, making it less competitive. This in turn runs the risk of pushing people into the arms of completely unregulated lenders and illegal loan sharks.

We agree with Consumer Focus that an industry code of practice is a good idea and that there should be better promotion and support for lower cost alternatives, such as credit unions. At the very least lenders should ensure customers understand exactly what they are agreeing to, and what the charges will be if their circumstances change and they can't meet repayments. Increased transparency is crucial.

"The OFT's own report highlighted that many people who use these loans have limited awareness about their financial options and what to do when things go wrong. We'd like to see an improvement in the future and support all campaigns for regulation in this area."