The Government recently announced it will be stepping up its efforts in putting limitations on unscrupulous payday advance lenders as detractors fear that lower income earners could be drawn into a vicious cycle of debt by instant cash loans.
Consumer affairs minister Ed Davey made the recent acknowledgement that concern about instant cash loan providers was growing, remarking that the Government had begun discussions with industry leaders to make sure that enhancements to consumer protections were made in the form of codes of practice. David Cameron also weighed in on the issue, as a spokesman for the prime minister stated that Downing Street was hard at work with both consumer organisations and the industry itself to provide protection to vulnerable classes of people.
As the incomes of Brits continue to be squeezed in the face of growing economic uncertainty, reduced access to traditional sources of credit have led to a rapid increase in the use of short term loans, with current estimates finding that around 4 million make use of the service every year within the UK.
Both consumer groups and politicians have long been leveling their ire against the providers of short term loans, as annual percentage rates run extremely high – sometimes as much as 5,000 per cent. However, industry experts are quick to point out that using an annualised method of calculating interest is inherently misleading when dealing with short term loans, as borrowers typically pay their loans back within one month to 45 days, which means that the actual cost of the loan is much more manageable than detractors lead the public to believe.
Debate has been raging on whether the Government should formally cap interest rates, much in the same way some European countries and US states do. However, a government report stated that reducing access to these loans could result in lower income earners being even more worse off, as short term loans are often the last resort of individuals who cannot turn to a traditional lender for support.