In Mel Brooks’ film, History of the World Pt I, the character of King Louis in the section on the French Revolution is asked by a young woman to free her father from the Bastille. He agrees by giving her the choice in the title of this blog. This is rather like the choice faced by the millions of customers of payday lenders at least if you listen to the large number of vocal campaigners against “legal loan sharks”. Indeed, in an earlier investigation of high cost credit (the 3 year investigation into Home Credit or doorstep lending*), a vicar actually submitted evidence to the Competition Commission that he advised his anguished parishioners who complained about repaying doorstep lenders’ loans that they’d be better off selling their bodies to raise money.
However, the problem is, as for the character petitioning King Louis in the film, the campaigns are against the symptoms and not the causes. In real life, the French realised this by decapitating the King rather than just wanting him to be a nicer king.
High cost credit is just that, high cost credit. It might be that the costs could be brought down a bit if the lenders are making excessive profits but by and large, the costs are high because the risks of lending to the sorts of people who borrow by such means are also high. Lenders could decide, as many banks and credit card companies in fact do, that the risks are too high to make it worth their while, particularly when they are under pressure to reduce their exposure to risk. If lending 125% the value of a house, secured on the house in a rising property market now looks like foolishness, lending someone on a low wage who is struggling to make ends meet anything at all and without any security can’t be anything other than very risky indeed.
Perhaps the rates charged are just so high as to be an affront to decency. Even if we put to one side the distortive effect of the APR calculation method which means that loans of less than a year’s term can generate apparently eyewatering interest rates, the interest on loans from people like Wonga is a large proportion of the amount borrowed. So, it is not illogical to conclude that perhaps those rates ought to be capped, although there’s then a question of what such a cap should be. For example, Ireland has a de facto cap of around 300% which does allow for it to continue to have doorstep lenders (technically known as Home Credit) but I suspect that campaigners against high cost credit in the UK are unlikely to see cap of 300% APR as a real victory, not least because this will still look “too high” compared to credit cards and personal loans. Bringing the cap down to a level near that for loans to those with better credit ratings is most likely to result in there being no credit legally available to sub-prime borrowers.
Maybe that’s a good thing – if there is one thing we can take away from the credit crunch and recession it is that we ought to be much less reliant on irresponsible borrowing just as much as financial organisations should cut out irresponsible lending. However, it misses the crucial point behind all the campaigns. The campaigns are not so much about high lending costs but about the problem of poor people not having very much money.
It is much easier to treat symptoms of this than to address the causes. So, poor people can be protected from high interest rates by capping them and then making pious noises about how marvellous credit unions are. Then when there’s no significant increase in the use of credit unions we can campaign against policies designed to control the level of benefits payments so that they don’t rise as fast as inflation with the aim of stopping poor people being so poor by giving them more money. Meanwhile, we can bemoan how even when they have “enough” money to live, they are marginalised because they are relatively poor in not being able to afford the things that other people have. So the Guardian can publish articles showing how even the highly generous Swedish welfare system is iniquitous because the poorest children can’t afford the kit to go skiing with their classmates. Ultimately any difference even in the most equal societies can be vehemently criticised.
Meanwhile, as symptom after symptom is sought to be alleviated, the underlying problem stays and indeed gets worse. Regardless of what is being done to benefits for those without disabilities, and on the basis of the jobs and incomes people actually have now, the things which are really causing problems for the poorest are ignored. One is the level of taxation that cannot be avoided -VAT, excise duty, fuel duty. The other is inflation. Inflation on things like food is running at something in the region of 30% a year. However, cutting taxes and tackling inflation are both a long way off the agenda of those complaining about the poor being poor. Although Labour has recommended a temporary VAT cut, it is only as a temporary measure “to stimulate demand” rather than as something to alleviate poverty.
Of course, it is a lot easier to argue for policies to tackle symptoms which might have immediate effects and look caring than to implement ones aimed at curing the underlying diseases. However, curing the disease is the only effective solution as can be seen by the way in which there was a boom in doorstep lending during the early 90s recession and how the sector shrank to a fraction of its size during the recovery that followed. It is also perhaps telling that that sector grew strongly in the years leading up to the crash of 2007-8 when there was no shortage of mainstream credit and a booming economy.
It is a shame though that the present government seems unable either to win the political battle of compassion for the symptoms or the economic battle against the causes convincingly.
* In the interests of transparency I have to mention that I represented the industry trade association for the Home Credit lenders during that investigation. One of the arguments we made was that the investigation ought to have covered consumer credit more generally (something like a quarter of home credit borrowers had mortgages and most had credit and store cards, personal loans and bank accounts with overdraft facilities), or at least to have extended to payday lenders, catalogue sales, christmas clubs and pawnbrokers. Curiously, this was rejected but is now amongst the demands of those campaigning against high cost credit.