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26/08/2004
Credit law reform will not have interest rate ceiling: DTI
An interest rate ceiling will not be introduced as part of the government's shake-up on consumer credit law, Consumer Minister Gerry Sutcliffe announced today.
The announcement was made after it emerged that research published today showed that interest rate ceilings can "limit low-income borrowers' access to credit, diverting them to less transparent and less appropriate products, or even to illegal loan sharks", the government said.
An interest rate ceiling is when a limit to the amount of interest that can be charged is set at a certain level.
However, the government has said that it would keep the question of an interest rate ceiling under review.
The study, commissioned by the DTI, examined the effect of interest rate ceilings in France, Germany and the USA and found that lenders do not provide credit for small loans repayable over a short period, excluding some low-income consumers from the market or leading others to take out larger loans than they need.
A ceiling also reduced the choice of products available, thereby limiting competition. And the percentage of consumers who admitted to having borrowed from unlicensed or illegal lenders was twice as high in Germany and France as in the UK, the study revealed.
Consumer Minister Gerry Sutcliffe said that alternatives to an interest rate ceiling provide a "better way to deal with problems in the market now, such as the high cost of credit and financial exclusion".
He added: "In fact, our evidence shows that ceilings can often have a negative effect, such as excluding low income consumers from the market or leading them to use products that they know are not really suitable for their needs and which make it difficult for them to control their levels of borrowing. However, this is an issue we will keep under review."
Teresa Perchard, Director of Policy, Citizens Advice Bureau welcomed the DTI's decision not to put a ceiling on interest rates.
"Our evidence is that extortionate credit is about much more than the interest rate - high pressure selling, unfair terms and conditions, hefty charges for letters and statements, expensive add-ons like insurance can all hide behind an interest rate."
(gmcg)
The announcement was made after it emerged that research published today showed that interest rate ceilings can "limit low-income borrowers' access to credit, diverting them to less transparent and less appropriate products, or even to illegal loan sharks", the government said.
An interest rate ceiling is when a limit to the amount of interest that can be charged is set at a certain level.
However, the government has said that it would keep the question of an interest rate ceiling under review.
The study, commissioned by the DTI, examined the effect of interest rate ceilings in France, Germany and the USA and found that lenders do not provide credit for small loans repayable over a short period, excluding some low-income consumers from the market or leading others to take out larger loans than they need.
A ceiling also reduced the choice of products available, thereby limiting competition. And the percentage of consumers who admitted to having borrowed from unlicensed or illegal lenders was twice as high in Germany and France as in the UK, the study revealed.
Consumer Minister Gerry Sutcliffe said that alternatives to an interest rate ceiling provide a "better way to deal with problems in the market now, such as the high cost of credit and financial exclusion".
He added: "In fact, our evidence shows that ceilings can often have a negative effect, such as excluding low income consumers from the market or leading them to use products that they know are not really suitable for their needs and which make it difficult for them to control their levels of borrowing. However, this is an issue we will keep under review."
Teresa Perchard, Director of Policy, Citizens Advice Bureau welcomed the DTI's decision not to put a ceiling on interest rates.
"Our evidence is that extortionate credit is about much more than the interest rate - high pressure selling, unfair terms and conditions, hefty charges for letters and statements, expensive add-ons like insurance can all hide behind an interest rate."
(gmcg)
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