No price controls for expensive short-term borrowing

June 16th, 2010

The Office of Fair Trading (OFT) has recently announced its decision not to recommend price controls on expensive forms of short-term borrowing that are causing or fuelling debt crises amongst the poorest in society.

In July 2009 the OFT announced that it was investigating pawn-broking, payday loan and home credit businesses with a view to possibly recommending restrictions on the high charges they have traditionally levied for their services.

The OFT has justified its decision by saying that while these types of short-term borrowing are expensive they do meet a need for people who could not otherwise borrow cash. That is to say the benefits gained by the poorest in society from having these services available outweigh the risks they present.

This is of course debatable but is potentially a good point and raises the question of what restrictions can be imposed to increase the level of protection. The OFT has said the government itself should take legislative action if it believes there is a problem.

The OFT initiated its investigation into the market for expensive short-term loans because of concerns that people who could not borrow elsewhere had to pay interest charges that were far too high. The decision makes clear that in the eyes of the OFT the high charges are part and parcel of the service provided, which does come with risks for the lender.

However, the OFT also found that most lenders show patience with repayment difficulties and do not excessively penalise borrowers when payments are late or missed. This may be true but will be of little comfort to those borrowers who have been ripped off.

The OFT suggests that imposing price controls would be very complex and difficult, and would protect a small number of borrowers while restricting access to credit for a large number.

Price controls would almost certainly lead lenders to either restrict their lending or stop it altogether. If lending was continued other charges would be imposed thereby defeating the whole point of the price controls.

The OFT’s recommendation the government should take steps to help short-term borrowers if they believe there is a problem could seem like passing the buck but it is the right thing to do given the complicated arguments for and against outlined above.

Perhaps the best policy in this field would be one educating people to make better borrowing decisions. There is also a recommendation for the establishment of a price comparison website for these types of loans and “wealth warnings” on loan adverts.

However, education about the consequences of bad borrowing decisions is the most important of these by far. Generally speaking if a consumer is in the position of having to use these short-term borrowing services they have made bad decisions and will have to pay for the mistakes. If they do not make the mistakes in the first place they will not be put at risk of abuse by morally dubious lending practises.

This entry was posted on Wednesday, June 16th, 2010 at 4:58 am and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

No price controls for expensive short-term borrowing

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