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Last Updated: Tuesday, 20 April, 2004, 17:00 GMT 18:00 UK
Interest rates: Does a cap fit?
Calculator and money
Opinions on capping are divided

Should there be a legal limit on the charges made when we borrow money?

There has not been a limit in the UK since 1974 when a 48 per cent upper limit on interest was scrapped.

But some people working with poorer families believe the government should reintroduce one as part of its review of consumer credit.

Higher cost credit

Provident Financial is the biggest home credit company in the UK. Its agents collect the repayments for mainly small loans from customers' homes.

The company makes a typical loan of 200 repaid at 6 a week for 55 weeks. The total cost is 330, an annual percentage rate or APR of 177 per cent.

Capping the cost

Charges like this have encouraged some people to call for a legal limit on the rate of interest that can be charged.

Such "caps" on rates apply in several other European countries including France, Finland, Germany, Greece, Holland, and Italy.

Steve Cullen, who runs the Citizen's Advice office in Warrington and sees many families who have got into difficulties paying high rates of interest, thinks a cap would help.

"I would certainly be in favour of an interest-rate cap."

"When one person in society can access credit at 6%, 7%, how much should another person be expected to pay? 30%, 40%, 50%, 60%, 70%, 80%, 90% into the hundreds of per cent? It's then becoming not only extortionate but completely morally unacceptable."


Provident Financial Chief Executive Robin Ashton told Money Box that he was not in favour of a rate cap and rejected the claim that the 177 per cent APR his company charges is excessive or extortionate.

"We have an all-inclusive service charge rather than an interest rate and that service charge includes a whole number of things that many other lenders have as optional extras or as hidden charges."

"Unlike most other lenders, if the customer faces changed circumstances and wants to reduce repayments or to reschedule the loan, we enable the customer to do that at no additional charge whatsoever."

And many consumer organisations resist a legal cap on interest rates too. They are supported by Elaine Kempson, Director of the Personal Finance Research Centre at Bristol University.

"An interest-rate cap sounds a very attractive idea. It's only when you start unpeeling things that you can see how it would actually impact on poor people and I think they would be the losers."

"I think what we'll see is that some of the lenders who give cash loans will simply withdraw from the market and therefore they will be much more likely to have to go to unlicensed lenders. We'll also see lenders getting round the interest-rate cap and imposing charges in other ways."

German lessons

Professor Udo Reifner
Udo Reifner: "If you have no choice, you take what you get and that's the problem"
But the German experience suggests this might not happen.

In Germany interest rates have been capped for more than twenty years and Professor Udo Reifner of the Institute for Financial Services in Hamburg says that the cap - currently around 20 per cent - has been a good move.

"Most predicted that many consumers wouldn't get any more credit. The opposite was true. There was a real explosion of consumer credit within the limits. So the positive effect was that many people were re-included into the ordinary credit market."

And he said that people who claimed poorer households liked the service they got from doorstep lenders missed the point.

"If you have somebody in the desert and you offer him dirty water and he's very thirsty he will drink it. So the question is why do we do deserts and dirty water and then ask the people what do you want. If you have no choice, you take what you get and that's the problem."

Government review

In the UK the government is consulting on the biggest reform of consumer credit for 30 years.

Although it has so far said it is not persuaded that a rate cap is the right approach, this is under consideration.

Consumer Minister Gerry Sutcliffe told Money Box: "The consultation period has just ended, we haven't made that decision yet.

"But I've been looking at bodies like the Citizens Advice Bureau who're saying that an interest-rate ceiling is not the only way to tackle this because part of the problem are other charges that are not prominent on the agreement right at the start."

Money Box Investigates: The Price of Poverty was broadcast on Tuesday, 20 April, 2004, at 2002 BST.

The programme will be repeated on Sunday, 25 April, 2004, at 1702 BST.

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