Shadow Housing Minister, Grant Shapps is actively campaigning for the government to tackle the growing problem caused by 'loan sharks'. His concerns arose as a result of several of his constituents reporting that they had received direct mail offering loans at a usury rate of interest.
Personal debt has grown substantially during the current Governments term in office due to the economic downturn. The amount owed now stands at in excess of £1.9 trillion - a staggering 74% of which is secured on their property. This means that the average family is now struggling to pay an average debt of over £60,000.
This level of personal debt is not sustainable, especially when personal circumstances change for the worse. Many families can no longer afford to do this due to unemployment or poor health; this leaves them vulnerable to repossession.
Missed and late payments on credit agreements means that high street loans are no longer possible. Paying the rent and mortgage has driven many people to turn to payday loans and loan sharks. Whilst the terms are not favourable, they are the only ones that are prepared to lend money. Mainstreams lenders have turned their back on struggling borrowers.
Whilst the Bank of England has set interest rates at just 0.5% (the lowest figure since 1694), loan sharks are offering to lend money at between 100% and 10,000% APR. Whilst there is no doubting the fact that default rates are higher amongst bad credit customers, the rate being charged goes way beyond what is fair and reasonable to charge.
Amongst the main reasons why interest rates are so high is the fundamental lack of competition in the home credit market. Almost 90% of the market is dominated by just six companies. This allows them to get away with charging a usury rate of interest. It is believed that this lack of competition means that consumers are being over-charged by as much as £100 million per annum.
One case study showed a £200 loan from one lender attracted between a 1351.7% and 9889.3% APR. This means that the amount the borrower owes has increased from £200 to £300 in a single month. Failure to make payment causes the level of personal debt to grow at an unsustainable rate and negatively affects credit rating.
Financial literacy is a further reason why getting out of debt is so difficult. A study by the Institute of Financial Services found that 79% of the UK population did not understand what an APR was. This new repost shows consumer education is poor when it comes to personal finance, and free advisory services have been under a massive strain since the credit crisis began.
Amongst the changes that Mr Shapps intends to introduce are greater industry competition and a free national financial advisory service. Whilst this will cost £50 million to operate, it will be funded by a social responsibility levy imposed on the financial services sector. A recent Treasury report showed that 75% of individuals would consider using this service to get out of debt should it be made available.
This report is a recognition that those who take out a payday loan are amongst the most vulnerable members of society. This group are far more likely to become trapped in a dependency cycle with little chance of getting out of debt.
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