Online high-interest loans are ‘borderline’ legal claims MSP

LOANS made by online credit firms charging sky-high interest rates could be “null and void” under Scottish law, a leading MSP has claimed.

Companies such as Wonga charge as much as 30 per cent APR a month on loans – £525.48 for a £400 loan – with decisions made on a credit application in just minutes.

However, Independent Lothians MSP Margo MacDonald claimed that some pay day loan firms operate on the “very borderline of legality” and don’t comply with Scottish law, where all credit deals have to be signed and witnessed.

MacDonald, who has now written to the Office of Fair Trading (OFT) demanding a probe into the lending practice, says the loans could also be illegal, as there has to be a 14-day cooling off period under existing legislation,

She said loan agreements with firms such as Wonga could be ripped-up because decisions about loans are made in minutes, with the money paid to the customer’s account well before the end of the cooling-off period.

The MSP has also challenged the right of online loans firms to charge interest on a loan, if the customer changes their minds within 14 days of the agreement.

MacDonald’s letter to the OFT says: “In Scotland, applications for credit must be signed and witnessed. If the applicant does not sign any agreement, per se, any agreement with the company is not witnessed. Under the regulations, the agreement would be null and void.

“An applicant should be protected by a 14-day cooling off period, governed by procedures which would be laid out in the copy of the signed agreement issued to the applicant.

“To take Wonga.com as an example, on their website they state that if an applicant changes their mind ‘within 14 days’ they can cancel by calling or e-mailing the company. An applicant will be asked to pay back the loan plus any interest accrued to that point – however, the regulations state that a lender should not charge any interest on a loan during the ‘cooling off’ period, if an applicant changes their mind.”

MacDonald had wanted to introduce a bill to cap the amount of interest companies in Scotland can charge, but she said the legal advice from Scottish Parliament officials was that the power lay with Westminster.

A Wonga spokesman declined to comment on MacDonald’s letter and the OFT confirmed it had “received the letter” which was under consideration.