News & Resources

Interest cap to be imposed on British lenders

Nov 29, 2013 Simon Williams

Just like every other business out there, short term lenders need to make a profit to be able to stay in operation. Consider it this way - a toy company might import some dolls from a different nation that cost only £10 to make in total, but the store owner will sell them for £20 in order to make a significant profit.

That type of markup seems to be accepted by the public, so why aren't interest rates tacked onto loans by short term lenders treated the same? These actions are necessary for both kinds of companies in question to make money - that's how businesses take care of overhead costs, pay their employees and continue serving clients into the future.

Nonetheless, short term lenders get a bad rap, despite the fact that the interest rates are how the alternative finance businesses make a profit. They're even further at a disadvantage, because the fees aren't usually explained to consumers by the media, so some people have a bias against the sector before they get the facts. For instance, the interest figure is introduced as an annual percentage rate and tends to appear large, but people need to know that these loans are intended to be weeks long, meaning that the percentage is slashed significantly.

It's no surprise, then, that with such misinformation, government leaders in the United Kingdom have largely taken a hard stance against the entire sector, despite the fact that it was a large help during the global recession. In fact, national leaders decided to place a cap on the interest rates levied by short term lenders.

Government steps into business sector
According to The Wall Street Journal, U.K Chancellor of the Exchequer George Osborne recently announced that the government will be imposing a cap on the costs of taking out such loans across the nation.

The source said that the specifics of the cap have yet to be decided and will be chosen by the Financial Conduct Authority (FCA) in the future. Moreover, interest isn't the only thing that will be restricted - late fees on such alternative credit options will also be monitored. Consumers have to realize that the late expenses required for missing bills when in a financial bind won't get any smaller, though.

The Financial Times reported that the FCA will take over the regulation of the short term lending sector in April, so leaders in the industry should look out for the proposed caps to be announced in the spring.

That being said, this move comes after former Treasury Minister Mark Hoban made statements that caps on the industry were not necessary, though Osborne claimed that "the move was not a U-turn," the news source explained.

What are lenders saying?
It makes sense that short term lenders are not thrilled about this development. In fact, largely because of past statements made by Hoban and others, the cap has come as a surprise to many. This is also due to the fact that many companies are more than willing to help consumers in any way they can when they need to make ends meet with alternative finance options.

"We are surprised by the Government's announcement as we already have voluntary caps on the number of times a loan can be extended and on fees and interest for people in financial difficulty," noted Consumer Finance Association Chief Executive Russell Hamblin-Boone, as quoted by The Mirror.

Hamblin-Boone also explained that entities in the sector are looking forward to discussions with government leaders to find a happy medium for all involved.

But who benefits?
What people might not realize is that the short term lending industry is very large contributor to the success of the British economy. These businesses do a great service to consumers, allowing them to take out money fast when they need to make ends meet. They also employ a number of third-party companies, like debt collectors if needed, as well as banks and other parties that process transactions.

Moreover, think of their influence during the recession, something that hasn't waned much. For instance, consumers were able to use money from lenders to stay afloat financially when unexpected expenses arose. This then means that because of the influence of such companies, individuals were likely able to pay utilities companies, car companies, mechanics, student loan corporations, doctors and other entities, potentially keeping many in business.

One population that might actually benefit from this activity is government leaders. The WSJ pointed out that the move to cap the interest occurred ahead of a general election in 2015, so politicians can use their stance to claim they are putting citizens' cost of living at the forefront of their campaigns. However, what they aren't saying is that these restrictive actions could put some lenders out of business, which is only bad for consumers.