Time to ban pawn shops charging interest of up to 287%
Tens of thousands of people in Ireland pay interest rates and fees of up to 287% per year to borrow small amounts of money.
An estimated € 153 million is currently owed to licensed money lending companies nationwide, mostly by those with the lowest incomes.
Despite a decade of extremely low interest rates and 0% PCP auto financing, legislation dating back to 1995 allows licensed money lending companies to charge interest rates of up to 187% and APRs ( annual percentage rates) of up to 287% at collection. charges are included.
A majority of their clients are women, from disadvantaged socio-economic backgrounds and aged 35 to 54.
According to figures from the Central Bank, around 330,000 people are clients of money lending companies. One of the largest categories are “building societies” which charge APRs of up to 287%. Another large group, the catalog companies, charge lower but still very high interest rates, ranging between 43% and 72%.
Typical home loans, also known as home loans, cover expenses such as back to school, Christmas, or emergency household expenses.
A report launched yesterday titled “Interest Rate Restrictions on Credit for Low Income Borrowers” examines the subject of enforcement of restrictions on high cost loans. 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 cracked down on high-cost credit.
Twenty-one EU member states now apply some form of interest rate cap on high-cost loans.
Ironically, Ireland is included in the 21 because we have an interest rate cap of 1% per month on credit union loans. But this restriction does not apply to lenders here.
The German Supreme Court, for example, has established a very strong presumption that interest rates above twice the relevant market rate lack moral legitimacy. A recent decision in Spain found an interest rate of 24% “excessive”, while in Finland interest rates of 118% were deemed “unreasonable”.
These examples raise the question of the moral legitimacy and social justice of allowing excessive interest rates for access to credit, which often targets the most vulnerable and financially excluded consumers.
Ireland is clearly in the minority not to address the issue. Paradoxically, until 1995, an interest rate restriction of 39% applied in Ireland.
Is it fair that money lending companies in Ireland today can be allowed to charge APRs of up to 287%, if low cost alternatives are available?
The report identifies that most clients of money lending companies appreciate the “ease of availability” and “convenience” of home collection by lending companies.
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However, it points to a 2013 British study which showed that 52% of mortgage users feel trapped in this borrowing cycle. European experts point out that high-cost loans can lead to an increased debt spiral and an inability to maintain payments for essentials such as rent and utility bills.
On the positive side, Ireland is recognized as one of the best credit union movements in the world. Credit unions represent a viable alternative to high cost credit providers.
This can be done through their standard loans or through the Personal Microcredit Program (PMC) launched in 2016. PMC is now offered in up to half of the country’s credit unions. Loans vary between € 100 and € 2,000 with a maximum APR of 12.7%.
The ability and willingness to repay the loan is of course essential. To date, thousands of such loans have been issued with a typical repayment savings of € 130 on a loan of € 500.
The report makes three key recommendations to government:
- Prohibit usurious interest rates by restricting interest rates and fees.
- Such a policy must be conditional on the credit union movement being engaged and able to serve existing clients of money lending companies, subject to prudent credit guidelines.
- The Ministry of Finance should consider increasing the monthly limit of 1% of interest rates for credit, in accordance with Art. 38 (1) (a) of the Credit Union Act, 1997, to cover the considerably higher costs associated with such small loans.
The study also recommends stronger protection for Irish consumers and the integration of greater financial inclusion into financial policy and service delivery, 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 organizations and social enterprises.