David Prosser: The dangers of a cap on interest rates

Outlook The Office of Fair Trading's decision not to impose a maximum interest rate on lenders such as pawnbrokers, payday loan providers and other high-cost lenders is a sensible case of the head ruling the heart.

Some of the headline rates charged by these lenders do look exorbitant and a cap must have been a tempting way to tackle the racket. But the result would have been more people being denied credit from companies that are at least within the orbit of the regulatory authorities. Many of them would have ended up going to illegal loan sharks instead, where high interest rates are often the least of their worries.

There is no doubt that some of the lenders operating in this sector are profiteering. But rates are high for a reason: the people to whom they lend do not have credit ratings that enable them to borrow from more affordable sources. The price of the loan reflects the enhanced risk of a default.

It's not just that borrowers would have nowhere else to turn without these lenders. Often, taking out these loans, and then making repayments on schedule, is their first step towards building the sort of credit history that gives them access to mainstream sources of finance in the future.

Better advice for the financially excluded is important and lenders should be policed carefully to ensure they are not exploiting their customers. But the OFT is right not to pretend this industry does not serve a need.

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