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Spend & Save

It's time to cull Britain's legalised loan sharks

A new campaign is fighting to end the problem of legal loan sharking, where borrowers are charged outrageous interest fees.

It hopes to force the Government to ban excessive loan charges and provide alternative sources of credit through community development finance institutions, credit unions and a people's bank based at the Post Office.

The problem of excessive interest rates has been widely reported in The Independent. Annual percentage rates (APRs) of 2,500 per cent or higher are far from uncommon.

To Gavin Hayes, the general secretary of the political pressure group Compass, this is scandalous. "More and more of us are using credit to make ends meet, yet loan companies are legally allowed to charge whatever they like for borrowing money," he says.

"Doorstep lenders are now charging up to £83 for every £100 borrowed, while some online payday loan firms charge 3,000 per cent APR. This is legal loan sharking, a national scandal which must come to an end."

He wants the Government to introduce caps on consumer credit and make sure that the promised people's bank at the Post Office offers people under financial pressure a real alternative. While it is easy to suggest that people should simply avoid borrowing money to avoid being hit by exhorbitant interest rates, in practice millions of people have little choice.

It could be for any number of legitimate reasons that a family needs a few quid to help them get by until payday. Borrowing on overdraft, credit card, or from a doorstep lender can be convenient and fine, until they get into difficulties and cannot repay the debt on time. Then legal loan sharking starts.

"Affordable, short-term credit is needed more than ever to help make ends meet as people face huge cuts in public services, reduced working hours, stagnant wages, and unemployment," says Mr Hayes.

"Yet because millions of people on lower and middle incomes are not catered for by many high-street banks, they have no choice but to borrow at usury rates."

The problem is that penalty charges and interest on interest means a small loan can quickly escalate into a comparatively huge debt, leaving a struggling person with much more difficulty paying it off. For instance, anyone borrowing £100 through a payday loan company may expect to pay only £10 or so for the privilege.

But if they miss the payment deadline, another monthly charge plus interest is added, so the debt could double after just a few months. Capping the credit would cut down the chance of debt spiralling out of control.

It s a problem the Government is aware of but, to date, it seems to have no concrete plans to help the hard-up. Lisa Nandy, the Labour MP for Wigan, who is supporting the campaign, says: "The Government has committed to curb excessive rates on store and credit cards but not high-cost credit. This means the three million people who use high-cost credit will have no defence against excessive profiteering. Is the Government looking out for the middle classes and ignoring the needs of the poorest borrowers?"

Mr Hayes hopes that, with people drowning in debt, millions will join the campaign and force the coalition to act. He is using social networking sites such as Twitter and Facebook to spread the word and urges people to sign a petition at www.endleagalloansharks.org.uk.

Case study

*Overspending on a credit card led to Dan McCurry being harassed by debt collectors for more than a year. "I went over my £500 limit on my card by just £3.50 but Capital One charged me a £25 penalty, which I thought was outrageous," says Mr McCurry, 44, a photographer from east London.

"I refused to pay the charge and instead paid off the outstanding balance and interest and cut the card up and sent it back. Capital One then charged me a further £25 a month until they said I owed them £250, which was ridiculous. They then got debt collectors to harass me for a year, and tried to bully me into paying money I didn't owe."

In despair, McCurry, reported the matter to police, only to be told they couldn't intervene "as a matter of policy". "It would have been different if I'd reported an individual for harassment, but because it was a big company with shareholders they seemed to be above the law."

He eventually went to the Financial Services Ombudsman, who effectively ordered Capital One to call off its bully boys. The process left Mr McCurry bitter about lenders. "These companies get away with disgraceful behaviour and have no fear of prosecution," he says. "The worst that will happen to them is a slapped wrist or a small fine."