Kezia Dugdale writes in today’s Scotland on Sunday about “predatory legal loan sharks”. A typical rate of interest cited by one of the lenders (I’m not going to link to it and give them a free advert) is 1734% APR, which is close to what you get to if you charge 27.5% a month at compound interest. A monthly rate of 36.5% adds up to something close to the 4200% APR that Ms Dugdale cites. Someone who starts with a debt of £50 which is rolled forward for six months will have more than £300 to pay back. (I got the sum wrong on the first posted version, because I’d changed my mind about the example to use in different versions – the perils of blogging!)
Here, then, is a modest proposal for reform: that debts which cost more than a certain rate per month, inclusive of all other fees and charges, should cease to be enforceable by the courts. Let’s say, for the sake of argument, that the maximum APR should be 12% a month, or about 290% a year. That’s still very high – more than fifteen times what a credit card loan costs from a reputable company, and more than enough to justify a risky short term loan. It’s a straightforward calculation; all the court has to look at is the original amount and the date of application, and apply a standard formula. If the company goes to court, that and nothing more is what they should get.
There is a precedent for this; for decades, until 2007, gambling debts were not enforceable in court. It didn’t stop gambling. If the lenders don’t like it, they don’t have to make the loan. But at a potential 290% APR, does anyone think that lenders would be hard done by, or that they would stop trading?