Comment on the Government's 'Better Deal for Consumers' White Paper

Published:

02/07/2009

Topic:

Press Release,Money,Loans

Commenting on the Government's "Better Deal for Consumers" White Paper, Tim Moss, head of loans and debt at moneysupermarket.com, said: "The Government needs to learn that it can't control both the availability of credit and the price.

"If the aim is to ensure a vibrant and competitive credit market for all sections of society, to keep people away from loan sharks, then lenders need to have the flexibility to price according to the cost of offering that credit and the risk. Some estimates now suggest that up to 17 million consumers are excluded from "mainstream" financial products and, as the White Paper correctly says, there is a danger that capping interest rates will leave large sections of society without access to legitimate, regulated, lenders.

"The White Paper completely misunderstands the concept of APR, and we now need to accept that APRs are not fit for purpose when comparing the cost of loans. Many of the smaller and less traditional lenders will charge a monthly or even weekly interest charge with the understanding that the loans are not a long term debt, but APR is a yearly calculation. This makes APR the wrong metric to use when look at these type of loans, and it would be far better to look at the amounts being paid back instead. For example, the APR being charged on many pay day loans might look extortionate at first glance, but pay day loans are short term vehicles for smaller amounts of debt. We need to understand that it is pointless to compare the cost of a payday loan with, for example, the cost of a bank overdraft - as the type of consumers who use payday loans don't have access to mainstream banking and overdrafts.

"Plans to make the whole lending process more transparent are to be welcomed, even if it is a case of shutting the stable door after the horse has bolted - most people in dire straights today will have got into this mess because of debt taken out quite some time ago. However, it bodes well for future borrowers.

"And while I am pleased the Government is addressing the issue of loan sharks, I fail to see how they will be able to implement the measures as most loan sharks will be unconcerned about Government rules and regulations and already operate outside the law.  
 
"I am very pleased to see the announced consultation regarding the proposed statutory Debt Repayment Plan (DRP), which I believe will force many credit providers to open their eyes to the problems they have created. The DRP would introduce an end date to consumers' debt repayments, meaning repayments cannot continue ad infinitum as they do now. I am just worried that this is only at the consultation stage, as action is needed now.

"Overall, though these look like a sensible and well balanced set of proposals that could make life easier for the millions of people excluded from mainstream credit providers or who are already struggling under an unsustainable burden of debt. In essence I agree with the measures the Government has put forward, and I am pleased to see them recognise that the bottom of the market needs much more help to get back on its feet.  My concern now is that if these proposals are not implemented quickly and effectively we will continue to see these consumers struggle."

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