Payday loan rate cap laws have circulated in various forms through the halls of state-level politics in the U.S. for years. Yet not all nations are so quick to cap the payday loans; they allow the wheels of the free market economy to dictate price. The Guardian indicates that the UK’s Office of Fair Trading (OFT) has opted not to place a rate cap on the nation’s payday loan industry, as doing this would harm competition and inflate prices for short-term consumer credit.
Resource for this article: UK Office of Fair Trading says no to payday loan rate cap By Personal Money Store
Payday loan system functioning ‘reasonably well’
Easy loans and other forms of payday loan credit are beneficial if credit-constrained persons can easily access them. The OFT sees this openness as allowing competition to dictate price within the free market. The level of competition between easy loan outlets may not be as effective as it might be, but the OFT is confident in their assessment that personal loan company markets work “reasonably well”. The OFT has moved forward with their pro-payday loan freedom stance, despite heavy resistance from the Archbishop of Canterbury and a variety of other special interest charity groups. The OFT did recommend that the uncapped UK pay day loans industry could use a uniform set of rules to help protect consumers from the minority of lenders whose practices may border on predatory.
Finance and Lending Association approves of OFT stance
The association’s Head of Consumer Finance, Fiona Hoyle, assured The Guardian that any form of payday loan rate control “would have adverse unintended consequences for consumers, including for the cost and availability of credit”. If governments follow the Office of Fair Trading’s lead regarding rate caps – and take note of the Dartmouth University study in the U.S. on the effects of payday loan rate caps in Washington and Oregon State – perhaps they’ll see just how maintaining competition can aid the consumer while nevertheless allowing easy loan outlets to reasonably profit.
Simply clamping down isn’t really the answer
Marie Burton, financial services specialist at the consumer group Consumer Focus – which operates independently from the money lenders industry – told The Guardian that the OFT has exposed just how hard it is to both promote competition and help drive down consumer cost. While that is the perfect, additional research into the workings of the short-term consumer finance industry within the UK may be necessary. Banks and credit unions have failed to mount serious competition within the short-term consumer lending market in America, but the OFT believes that finding a way to level the field by introducing them successfully to the UK market could be of great benefit to the consumer.
A lot more data on this topic
http://www.guardian.co.uk/money/2010/jun/15/doorstep-lenders-interest-rate-cap/
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