Bid to ban steep rates at 'payday' lending firms

PAYDAY loan firms offering short-term credit to poorer customers could have the amounts of interest they charge capped under a proposed change to the law in Scotland.

Independent Lothian MSP Margo MacDonald wants to criminalise companies imposing sky-high APR rates on customers after it emerged that lenders were charging as much as 30 per cent in interest a month.

MacDonald told Scotland on Sunday that she will introduce her "Access to Fair Credit" bill, which includes proposals to clamp down on "unreasonable rates of interest", to the Scottish Parliament later this year.

A copy of a loan agreement from online lender Wonga.com showed that it would charge 525.48 for a 400 monthly loan - an interest rate of about 30 per cent.

The Money Shop, owned by US corporation Dollar Financial, also hands out relatively small sums for the short term at a cost regularly exceeding 30 per cent a month.

However, the Lothian MSP wants the amount firms can charge in interest to be restricted to no more than "two or three times the average APR rate".

She said: "It's not just very poor people who take out these loans, as some people see firms like Wonga as offering a simple alternative to banks.

"The cap could be two or three times or three and a half times the average interest rate.

"The bill would make it a criminal offence to charge interest above the cap. In practice it would just make those agreements unenforceable in Scottish law."

The MSP said she was not trying to "push" lending firms out of business by demanding a cap on the level of interest rates firms can charge.

"This is not about trying to push people out of business," she said. "It's about putting the brakes on unreasonable rates of interest that some short-term loans attract.

Citizens Advice Bureau Scotland (CAB) said a series of cases had revealed high levels of debt among customers of credit firms.

In one case a CAB client took out a payday loan of 200, with 25 per cent interest repayments. However, he fell ill before he could repay the cash and the company took 325 from the following month's wages, which left the client with little to live on.

The CAB said that in another case a client took out a payday loan, only later to discover that the APR on the loan was 1,700 per cent.

CAB Scotland's chief executive Lucy McTernan called for an end to "irresponsible lending" which she said was "a blight on society" in Scotland.

MacDonald's bill has already won the support of Scottish Labour's shadow finance minister Richard Baker and Labour MSP Jenny Marra.

MacDonald's proposals were welcomed by credit unions, with Dermot O'Neill of the Scottish League of Credit Unions describing the move as "long overdue".

"It's totally wrong that in a modern society like the UK we don't have a cap on interest rates for loans," he said. "Many other countries have caps and it's long overdue that we followed that approach."

But high-street payday loans firms suggested that restrictions on the rate of interest they could charge would drive customers into the arms of loan sharks.

A spokesman from the Money Shop said: "The Money Shop only offers short-term lending to people with a bank account and in employment.

"If responsible payday lenders such as The Money Shop were prevented from operating, the likelihood is that people would turn to illegal loan sharks, which could have devastating consequences."

Errol Damelin, founder and CEO of Wonga.com, said: "Our customers are not vulnerable people without choices. They are typically young professionals who have access to full banking services.

"A 400 loan is the maximum amount a new applicant can request and a month is the maximum period, meaning it's far from a typical example.

"Our customers can choose the exact size, length and cost of a loan before applying, and a standard loan would be more in the region of 150 over a fortnight."

A Scottish Government spokeswoman said: "We will take a view on the competence of Margo's proposals when we see the details of the bill."