Today’s research report carried out by the Social Finance Foundation, “Interest rate restrictions on credit for low income borrowers” recommends the introduction of a cap on the maximum interest rates that can be charged to borrowers. This would reduce the cost of credit for low income consumers and is broadly welcome.
Many people will get into debt in the run up to Christmas. They may get a ‘lend’ from family members or friends, they might purchase toys and other gifts from catalogues or they might borrow from their Credit Union, bank or a moneylender. Borrowing is often the only way a household with an inadequate income can make ends meet. Around 350,000 people borrow from licensed moneylenders.
Caroline Fahey, SVP Head of Social Justice said “For people on low incomes who find it very difficult to meet large or unexpected expenses, access to affordable credit is important. For the most part, people who take out high cost loans are aware of the cost but borrow the money out of necessity. Living on a low income and having a poor credit rating limits the options for people who are trying to access credit. Moneylenders are meeting a need for access to credit but often at a cost which people who are better off and who have other options would baulk at. Repaying such a high cost loan is a very heavy burden for households that are struggling.”
SVP is also concerned that moneylenders adhere to the Consumer Code for Licensed Moneylenders, which prohibits offering roll-over loans among other issues. Caroline Fahey added “The Central Bank must monitor the operation of licensed moneylenders, and must sanction those who are not operating according to the Code. We also need to make sure that consumers are made aware of the cost of taking out a high interest loan and have clear information and financial education about any alternatives available.”
Kieran Stafford, SVP National President said: “It is important to ensure that people on low incomes and who may not have a good credit rating are able to access credit should they need to. However, many of the people we assist are in debt and some cannot see a way out. Living with a debt hanging over their heads is making it impossible for them to plan for the future. Addressing interest rates is important but we also need to consider why so many people are resorting to high cost moneylenders - for example, we need to see more affordable options like the Credit Union expanding their offering to people on low incomes.”
Caroline Fahey said “The It Makes Sense loan is currently being offered by about half of Credit Unions nationwide and allows people on social welfare payments to take out a loan and repay it through the Household Budget Scheme or by a direct debit, building up their credit rating and giving access to more affordable credit. By way of example, a €500 “It Makes Sense” loan, repaid over 6 months with an APR of 12.68% will charge interest of €15.84. The same loan from a licensed moneylender at a rate of 187.2% APR will charge €150 in interest. But if your local Credit Union is not offering the more affordable loan, your only option might be to approach a moneylender.”
Kieran Stafford concluded “Many of the families we visit will struggle to make ends meet this Christmas and some will consider borrowing money to meet the extra expenses they face at this time of year. Being able to access affordable credit, rather than loans with extremely high interest rates is essential if families are to avoid becoming over-indebted. We would urge anyone who is struggling, particularly with the cost of education, fuel and food this Christmas to avoid getting into debt and to come to SVP if you need our help.”