Page last updated at 17:14 GMT, Thursday, 3 February 2011

MP urges government crack-down on legal loan sharks

The government has been urged to take action against so-called legal loan sharks who encourage people to take out loans with "eye-watering" interest rates.

Labour backbencher Stella Creasy called on ministers to support a backbench business motion seeking to cap the total cost of lending that is being charged in the high-cost credit market.

She said there had been a fourfold increase in the use of payday loans since the beginning of the recession, but because no caps were in place enormous levels of interest rates were being charged, in some cases ranging from 271% to 440%, and even 4,000% or more.

Junior Business Minister Ed Davey said the government had not reached final conclusions on the issue, but he warned about the dangers of introducing regulations that could have "unintended consequences".

Opening the debate on 3 February 2011, Ms Creasy, who tabled the motion with Tory MP Justin Tomlinson, explained that the proposals were not about setting a single cap for interest rates, or about how to abolish the high-cost lending market or stop people borrowing.

"It is about the payday loans - the £100 until the end of the month that keeps getting repeated. It is the doorstep lending - the £200 they offer you so you can buy a new sofa. It is the higher purchase agreements - the deals you sign so your kids can have a new television."

The poor, the disadvantaged and recently unemployed were routinely targeted and exploited by companies to take out loans, she said, and noted the problems of financial exclusion, lack of education on debt and the lack of competition in the unsecured lending market.

Speaking for the opposition Nia Griffiths said the Labour frontbench were "very pleased to support the motion".

Responding for the government Mr Davey said: "What seems sensible at first glance could have huge unintended consequences for those who we are trying to help. Without a proper assessment of the evidence, it would be rash and frankly negligent to rush into this proposal."

Tory Robin Walker also urged caution against introducing regulations that forced companies to impose caps.

"To regulate without a very careful analysis of the market could carry great risks and, as so often has turned out in the past, such regulation could have unintended consequences."

His amendment, which would urge regulators to consider imposing caps rather than compel them to, was passed by 271 votes to 156, a majority of 115.

Ms Creasy's motion was then approved, as amended.

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