How misguided attempts to curb payday lending could harm those most at risk

(Source: Reuters)

The Citizens Advice Bureau has called for the "OFT to use its powers to immediately ban payday lenders its investigation finds are causing harm to borrowers".

Chief executive Gillian Guy said:

The payday loan industry is out of control and is acting as a law unto itself. It has showed a complete disregard for its customers.

However such calls ignore that the impact of a ban could be even worse, potentially driving customers towards illegal loan sharks. The Institute of Economic Affairs' Steve Davies explains why limiting payday lending can harm those most at risk:

The Department for Business, Innovation and Skills undertook research of restrictions to payday lending back in 2004. It found that Germany and France, which both have interest rate caps, had around five times the level of complete financial breakdown (like bankruptcy) among people who had trouble with debts.

The same study showed that an absence of high interest payday lenders would make short-term cash flow problems more serious and harmful than they otherwise needed to be. The use of illegal loans was found to be much greater in France and Germany, at nearly three times the UK figure. If cash is needed in the short term to meet a utility bill, for example, it’s far better that liquidity is provided by a payday lender than by a truly unsavoury loan shark.

All the evidence suggests that, by restricting legitimate payday lenders like Wonga and its competitors, you are not helping the poor and vulnerable. You are creating troubles that could make the poor’s difficult financial position even worse.

(Full article)