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Opinion: It is time to ban moneylenders charging interest of up to 287%

330,000 Irish people are customers of moneylenders, many of them risk getting caught up in a vicious cycle of debt, writes Brendan Whelan.

Brendan Whelan

TENS OF THOUSANDS of people in Ireland are paying interest rates and charges of up to 287% annually to borrow small amounts of money.

An estimated €153 million is currently owed to the country’s licensed moneylending firms, mainly by those with the lowest incomes.

Despite a decade of extremely low-interest rates and 0% PCP car finance, legislation dating back to 1995 allows licensed money lending firms to charge interest rates of up to 187%, and APRs (annual percentage rates) of up to 287% when collection charges are included.

A majority of their customers are female, drawn from lower socio-economic backgrounds and aged between 35 and 54 years.

According to Central Bank figures, an estimated 330,000 people are customers of money lending firms. One of the largest categories are ‘home credit companies’ which charge APRs of up to 287%. Another large grouping, catalogue companies, charge lower but still very high interest rates of between 43%-72%.

Typical home credit loans, also known as doorstep loans, cover costs like back-to-school, Christmas or emergency household spending.

A report launched yesterday entitled ‘Interest Rate Restrictions on Credit for Low-income Borrowers’ looks at the topic of applying restrictions on high-cost lending. The research was conducted by UCC and was funded by the Social Finance Foundation and the Central Bank of Ireland.

EU countries have for many years clamped down on high-cost credit.

Twenty-one EU member states now have some form of interest rate cap on high-cost credit.

Ironically, Ireland is included in the 21 as we have an the interest rate cap of 1% per month on credit union lending. But that restriction does not apply to moneylenders here. 

The German Supreme Court, for example, has established a very strong presumption that interest rates above double the relevant market rate lack moral legitimacy. A recent ruling in Spain found an interest rate of 24% “excessive”, while in Finland interest rates of 118% were deemed to be “unconscionable”.

These examples raise the question of the moral legitimacy and social justice of permitting excessive interest rates for access to credit, which often targets the most vulnerable and financially excluded consumers.

Ireland is in a clear minority in not addressing the issue. Ironically, until 1995, an interest rate restriction of 39% applied in Ireland.

Is it right that money lending firms in Ireland today can be allowed to charge APRs of up to 287%, if low-cost alternatives are available?

The report identifies that most customers of money lending firms value the ‘ease of availability’ and ‘convenience’ of home collection by moneylending firms.  

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It points, however, to a 2013 UK study which showed that 52% of home credit users feel trapped in this cycle of borrowing. European experts highlight that high-cost lending can lead to a spiral of increased indebtedness and an inability to maintain payments for essential items such as rent and utility bills.

On the positive side, Ireland is recognised as having one of the best credit union movements in the world. Credit unions represent a viable alternative to high-cost credit providers.

This can be through their standard loans or through the Personal Micro-Credit (PMC) loan scheme launched in 2016. PMC is now on offer in up to half the country’s credit unions. Loans range between €100 and €2,000 with a maximum APR of 12.7%.

Ability and willingness to repay the loan is of course essential. To date, thousands of these loans have been issued with typical repayment savings of €130 on a €500 loan.

The report makes three key recommendations to Government:

  • Prohibit usurious rates of interest by a restriction on interest rates and charges.
  • Such a policy to be conditional on the credit union movement committing to and being enabled to serve those currently customers of moneylending firms, subject to prudent credit guidelines.
  • The Department of Finance should consider increasing the 1% monthly cap on interest rates for credit as per Sect. 38 (1)(a) of the Credit Union Act, 1997, to cater for significantly greater costs associated with such small lending.

The study also recommends enhanced protection for Irish consumers and embedding of greater financial inclusion in policy and financial service provision, including initiatives around financial education.

Brendan Whelan is the CEO of the Social Finance Foundation, a wholesale lending agency that supports the development of community organisations and social enterprises

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Brendan Whelan

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