As many of us pack our flexible friends to jet off on holiday it’s worth noting that in April this year private debt owed by the British people stood at a sky high £1460bn – that’s a hell of a lot of plastic! Of course many of us these days have a credit card, loan or overdraft and nearly all of us will at some point in our lives experience being in debt in one form or another. In fact if used sensibly credit can be a good thing – it can help us through life to get a University education, own our own home or set up our own business.
But as we have seen in recent years irresponsible lending and high levels of unaffordable debt can not only be harmful to individual borrowers, it is also bad for our economy. It was the selling of dodgy loans at high rates, especially to those on lower incomes that played a key role in causing the worst financial crisis for over half a century. High debt repayments are bad for society and are linked to a whole raft of social ills including rent, council tax and utility arrears, constraints on job seeking behaviour, poor diets, cold homes as well as increased mental health problems such as anxiety and depression.
It is therefore very worrying indeed that in Britain today, as those on lower and middle incomes struggle to make ends meet in tough economic times, many are being forced to turn to high cost predatory lenders who are legally allowed to charge whatever they like for credit. The problem made all the worse of course by High Street banks refusal to offer short-term and flexible credit to some of the very same people who have bailed them out. Let’s be honest for millions of us who go in search of ‘helpful banking’ the answer is all too often ‘computer says no’.
So ingenious have the whizz kids at some of the high cost lenders become that there is now an iPhone App in which payday loan companies will transfer money directly into your bank account all at the touch of a screen – providing you’re prepared to pay the equivalent of a mind blowing 3000% APR. Then there are the smiley smiley door to door lenders who charge up to £83 for every £100 borrowed. Allowing companies to charge usury rates that are over five thousand times the bank base rate of half a percent is nothing short of a national scandal, it is legal loan sharking and it must now be stopped.
The government has already committed in the coalition agreement to long overdue action on credit cards, store cards and overdrafts, but it hasn’t yet promised any specific action to rein in the legal loan sharks. So as part of the forthcoming Financial Services Bill the government should now commit to the sensible policy of lending rate caps to cover all consumer credit. Such caps are already in place in Germany, France and Poland and many US states – so why not Britain?
A lending rate cap also needs to be accompanied by action to ensure alternative access to affordable credit . Why not introduce a ‘Peoples’ Bank’ using the Post Office network? Why not give more support to credit unions and set up a National Credit Union? Last but not least we should make all banks, properly commit to provide everyone with universal and affordable banking services. This could be part of their bail out quid pro quo, forcing them to do something socially useful for a change.
It simply cannot be right to carry on allowing financial institutions to charge people whatever they like for credit – the case for allowing them a free rein is both morally and economically bankrupt. It is bad for society and it is bad for the economy. This is why we now need urgent action to end legal loan sharking and introduce lending rate caps to cover all forms of consumer credit.