DTI says no to interest rate cap

People get into financial trouble even when interest rates are capped

The government has decided not to introduce a cap on interest rates on credit cards and loans.

A cap could make it hard for low-income consumers to get credit, the Department of Trade and Industry (DTI) said.

People in countries where rates are capped are in fact more likely to have financial problems and borrow from illegal loan sharks, the DTI said.

The DTI report comes amid consumer concerns that interest rates of up to 300% are exploitative.

Protecting borrowers

Laurence Baxter, policy adviser at the Consumers' Association said he was in support of interest caps - and believed the government should eventually introduce them.

Ceilings can often have a negative effect, such as excluding low income consumers Gerry Sutcliffe, consumer minister

However, he said price caps could not be introduced until the government offered greater protection against underground lenders.

"We think rate caps could be a very good idea, provided the government comes up with ways that it could pick up the poor people who are driven to illegal lenders," he told BBC News Online.

Capped rates 'don't work'

The UK has not had interest rate ceilings since the 1974 Consumer Credit Act, which governs the use of credit in the UK, was introduced.

Other European Union countries, such as France, Germany and Ireland, do cap interest rates.

Consumers in these countries do however still get into financial difficulties, the DTI report found.

French and German borrowers with credit problems are more likely to go bankrupt or default on loans than their counterparts in the UK, the report found.

The number 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 report found.

Lenders in the Republic of Ireland offer a smaller range of short-term loans than lenders in the UK, a fact which is attributed to the interest rate ceiling of 200%.

Gerry Sutcliffe, consumer minister, said: "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."

Citizens Advice supported the government's decision not to cap 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," said Teresa Perchard, its director of policy.

The DTI said it would keep its decision under review.