James Moore: Rates cap would rein in these malign lenders

Outlook The Insolvency Service prompted another bout of hand-wringing yesterday about payday loans and their malign impact on those that use them.

The retreat of the banks, combined with financially strained consumers (particularly at this time of year), has sparked a boom in the sector. Pawnbrokers and other traditional providers have been joined by a bewildering array of online operators. Their poison, though, is the same, and its effect is to siphon money out of the pockets of those with budgets that are least able to cope.

The Office of Fair Trading has investigated, and found that despite the detrimental effects, such services are "valued" by consumers. But even it has admitted that there is precious little evidence of price competition. Why is this not a surprise? If you are desperate enough to be willing to pay fees that equate to APRs of 1000 per cent or more, you'll probably take what you can get.

Valued it may be, even useful on occasion, but the trouble is that such short-term, ultra-high interest loans are habit-forming. People all too often use them as a crutch, becoming dependent on them, even going without basic staples to meet repayments.

It might help if there was some genuine competition, say from credit unions. Efforts to encourage them have, however, been half-hearted, with mixed results. The regulatory burden is acting as a brake on progress, although perhaps some form of subsidy, a social charge if you like, from the fees paid by banks might help.

In the shorter term, it is surely time for the OFT to take a second look. An interest rate cap might be unpalatable, but has worked in Ireland, and might at least rein in the worst excesses of those who push the crack cocaine of the lending industry.