Business minister Jo Swinson has warned against using interest rate caps to tackle payday lenders, saying they could force borrowers to turn “more unsavoury alternatives”.
Speaking at a Liberal Democrat fringe event in Glasgow this week, Swinson said: “The cap assumes the biggest problem in the industry is rates, when there are other areas where the detriment lies. If someone cannot repay a loan then they should not be given it whether it is 10 per cent, 100 per cent or 1000 per cent. That needs to be sorted.
“We also need to be wary of unintended consequences as the evidence shows people who genuinely need credit and can afford to pay it back may suddenly not be able to get credit or turn to more unsavoury alternatives. It could also push up default charges or arrangement fees. Customers may get a warm fuzzy feeling because the interest rate is lower but might not end up paying less.”
LibDem MEP Rebecca Taylor, also at the event, said research in countries such as France, Germany and Poland show caps exclude people from short-term loans and encourage lenders to find “ingenious ways” to get around caps buy pushing up loan costs.
The FCA will take over regulation of the payday loans sector from the Office for Fair Trading next April.