Dr Olive McCarthy and Dr Noreen Byrne of UCC say while new Central Bank rules for moneylenders are welcome, they don’t go far enough.
A WEEK AGO, the Central Bank unveiled tighter regulations aimed at protecting consumers who avail of high-interest loans from licensed moneylenders. Currently, moneylenders are permitted to charge up to 188% Annual Percentage Rate (APR), rising to 288% when permitted collection charges are included.
Could you imagine walking into a bank and being told your loan must be paid back at that rate? Most commonly, licensed moneylenders offer loans at an APR of up to 125% before collection charges.
Compare this to Credit Union loans, which often carry interest rates of between 6% and 10% APR, and are ultimately capped at a maximum of 12.67%. This price differential is difficult to justify.
These new regulations will require moneylending firms to warn consumers of the high cost of credit in product advertisements, as well as encouraging consumers to consider alternatives.
Any change welcome
While the new rules have been broadly welcomed and should serve to offer additional protection, legislative change is required to introduce a cap on the interest rates charged by moneylenders to ensure that all consumers have access to reasonably-priced credit.
In recent weeks, St Vincent de Paul issued a warning to the public about an increase in moneylending activity on foot of the Covid-19 crisis. Convenience, ease of access and inter-generational relationships with moneylenders are often cited as the reasons why consumers source credit from such organisations.
For some consumers, borrowing from a moneylender is seen as a ‘way of life’. Many moneylenders offer ‘doorstep credit’, where payments are collected from the borrower’s home. There have even been a number of anecdotal reports of moneylender agents meeting their customers at the post office as they collect social welfare payments.
Others have arrangements to collect repayments from inside their ESB meter box or under the doormat. While this is undoubtedly convenient, it is also very expensive, not to mention the risk and the intrusive nature of such a relationship.
Many consumers focus on the affordability of the repayments rather than the actual cost of the loan. Once the repayment is deemed to be affordable, cheaper alternatives are often disregarded. As a result, there are at least two issues at play here: the choices that consumers make and the high cost of loans provided by moneylenders.
Consequently, while the new regulations should go some way towards supporting consumers in making a more informed choice, it remains to be seen if warnings will be effective. Prior to the dissolution of the Dáil earlier this year, the process of introducing such legislation was underway.
The APR must be capped
At the end of 2018, the Consumer Credit Amendment Bill aimed at capping the interest rate chargeable by moneylenders at 36% APR was passed by the Dáil. The Bill reflects trends found across the EU, where many countries, including Germany, France and Italy, have introduced interest rate caps to curb the costs of borrowing from moneylending firms.
Subsequently, in the summer of 2019, the Department of Finance initiated a public consultation seeking views on the introduction of an interest rate cap. One of the fears highlighted at the time was that capping the rate of interest could reduce the supply of moneylending credit and thereby increase the use of illegal moneylenders.
However, despite such fears, there is no published evidence to suggest that consumers will turn to illegal moneylenders when access to licensed moneylenders is restricted. Furthermore, supporting existing alternatives, such as credit unions, will give people an affordable alternative.
Introducing restrictions on interest rates and limiting the total cost of credit can help ensure that a fair and reasonable price for credit is provided to all. Users of moneylenders come from all segments of society, although most are likely to be from lower socio-economic groups and thus least able to afford high-cost credit.
A restriction on interest rates and the total cost of credit will force moneylending firms to re-examine their business model. While this may result in some consumers no longer being able to access credit, there is a high probability that some of these consumers would not pass a rigorous affordability check and may already be overindebted.
With the dissolution of the Dail earlier this year, the proposed legislation to cap interest rates for moneylenders at 36% has lapsed. Therefore, it will be incumbent on the new government to push for change once more. Financial education and awareness programmes promoting cheaper sources of credit will also be essential.
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The Competition and Consumer Protection Commission has said that financial well-being in Ireland would be improved through the promotion of active saving and not borrowing for daily expenses. A government-led strategy to improve financial capability, including financial education initiatives, will complement a cap in interest rates.
Dr Olive McCarthy is a researcher with the Centre for Co-operative Studies, Cork University Business School at University College Cork. Dr Noreen Byrne is Acting Director of the Centre for Co-operative Studies, Cork University Business School at University College Cork.