Page last updated at 15:22 GMT, Friday, 9 January 2009

Home credit loans 'extortionate'

Money and purse
Short term loans can have extortionate interest rates, the Tories warn

Some "pay-day loan" companies charge as much as 10,000% annual interest on their loans, according to a report from the shadow housing minister.

The minister, Grant Shapps, said such rates of interest were "obscene".

He said the extortionate interest charges were due to a lack of competition in the home credit market.

He added that the problem could be tackled by the wider use of credit unions and the creation of a national financial advice service.

Mr Shapps said he was prompted to investigate the issue after several constituents complained to him.

"When a constituent showed me a leaflet offering doorstep loans at 184% APR, I decided to investigate how the home credit market operates," he said.

"It wasn't long before I had uncovered pay-day loans of up to a staggering 10,000% APR," he added.

Saddled with debt

In a snapshot of the costs of taking out "pay-day" loans, Mr Shapps found that it was commonplace for lenders to charge 250 for lending 200 for just one month - equivalent to an annual interest rate of nearly 1290%.

He said the monopoly position of these big firms meant they were allowed "to prey on those saddled with debt and struggling with poor credit ratings".

An additional remedy identified by Mr Shapps was for the main home credit firms to be forced to share information with each other about their customers, so that borrowers could move freely from one lender to another without damaging their credit ratings.

"The lack of competition within the home credit market has created the right environment for extortionate APRs," he said.

In 2006 the Competition Commission, after an enquiry lasting two years, told the industry that its members must provide clearer information to their consumers about the costs of their loans.

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