Short-term debt: `no need for price control`
18/06/2010
The Office of Fair Trading (OFT) has decided not to recommend any price controls on payday loans and other forms of short-term debt.
In July 2009, the OFT began looking into a few forms of short-term debt - not just payday loans, but also home credit, rent-to-buy and pawnbroking.
Its decision? That although borrowing money like this was expensive, it still met a need for people who didn`t have any access to other forms of credit.
As the OFT`s press release says: `Products supplied in these markets are typically used by people on low incomes who cannot access mainstream credit and who borrow small sums for short periods.`
Furthermore, the Government should address the issue itself if it thinks it`s necessary, the OFT said, pointing out that `More radical approaches which are beyond the OFT`s remit would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.`
The OFT did consider the need for price controls, but decided that this wouldn`t solve any problems - and could actually cause new problems.
After all, it said, the problems in the high-cost debt sector `stem from both limited supply options and consumers` lack of ability to drive competition`.
And imposing price controls would be difficult and could just make things worse, as suppliers might try to recover the money they lost by introducing / increasing charges for people whose debt repayments were late, or who defaulted on their debts.
The review did make a few significant findings:
• Many people who access high-cost debt don`t know about the options open to them - and advice is limited.
• They normally focus on how quickly and easily they can borrow money, and on the affordability of the repayments - not on how much it`ll cost in total, compared with other forms of debt.
• Few `significant` new lenders have appeared in these markets recently.
• There`s very little price competition in some high-cost credit markets.
• Some of the `incumbent suppliers` seem to be making serious profits.
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