Capping payday loan rates would not help borrowers, OFT warns

Introducing price caps on expensive payday loans could reduce the availability of credit for consumers and force lenders to hike late payment charges, the Office of Fair Trading (OFT) warned today.

The watchdog said more needs to be done to help consumers make more informed decisions when taking out expensive short-term loans, but claims it can not do this alone and urged the government to take a 'radical approach'.

In its review the OFT said the problems in the high-cost credit sector - which includes the pawnbroking, payday loan, home credit and credit markets - stem from limited supply options and consumers’ lack of ability to drive competition.

Such products are typically used by people on low income who cannot access mainstream credit and who borrow small sums for short periods.

The OFT said: 'In a number of respects, these markets work reasonably well in that they serve borrowers not catered for by mainstream suppliers, complaint levels are low, and there is evidence that for some products, lenders do not levy charges on customers who miss payments or make payments late.'

However, the OFT said the advice available to consumers is limited and people tend to focus on how quickly and easily they can access credit and the affordability of repayments, rather than the total cost compared to other products.

Ray Watson, OFT director of the credit group, said: ‘Our report has found that people who use high-cost credit have limited options and find it difficult to exercise what choice they have to obtain the best deal. This means that competition between suppliers is less effective than it might be’.

Fiona Hoyle, head of consumer finance at the Finance & Leasing Association, said: ‘We agree with the OFT that price controls would not be appropriate because they would have adverse unintended consequences for consumers, including for the cost and availability of credit’.

‘We hope that the government will take careful note of these arguments against price capping when it considers the credit and store card markets,' she added.