Interest rate restrictions on credit for low income borrowers

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Faherty, Mary
McCarthy, Olive
Byrne, Noreen
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University College Cork, Centre for Co-operative Studies
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The aim of this report is to examine the extent and variety of interest rate restrictions within the EU and further afield with a view to assessing the appropriateness of introducing such a restriction in the Irish market given its specific circumstances and financial environment. Moneylending is a form of lending which is legislated for and is subject to authorisation and regulation within the boundaries of the relevant legislative provisions. All licensed moneylenders in Ireland are currently subject to a restriction on their maximum APR and total cost of credit. They are currently licensed to charge up to 188.45% excluding collection charges and up to 287.72% including collection charges. It is important to note the distinction between interest rates and annual percentage rates (APRs). The latter shows the true cost of the loan as it includes both the interest and any fees and charges. It is important to note also that the shorter the term of the loan the higher the APR. Convenience and ease of access are often cited as the reasons why consumers engage with moneylenders, despite the high cost of moneylending credit. However, while it is convenient for the individual, there is a higher than necessary cost for the individual, their family and the wider community. The overall remit of policy, legislation and regulation should be to widen existing alternatives such as credit unions and the Personal Microcredit Scheme. It is in this context that the appropriateness of continuing a legislative provision that, from a customer viewpoint, allows extremely high interest rates and charges to be levied on those who can least afford to pay them can now be questioned. It is acknowledged that the success of any legislative change requires an accompanying infrastructure that will serve as the mainstream alternative to the moneylending sources of credit. The overall remit of policy, legislation and regulation should be to encourage and support existing alternatives, such as credit unions, which are currently the only and practical alternative.
On behalf of the Social Finance Foundation
Interest rate restrictions , Moneylenders , Moneylending industry , Credit Unions , Personal Microcredit Scheme
Faherty, M., McCarthy, O. and Byrne, N. (2017) Interest Rate Restrictions on Credit for Low Income Borrowers, Cork: University College Cork, UCC Centre for Co-operative Studies.
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© 2017 the authors; Social Finance Foundation