Capping the cost of credit

By Joe Cox / @compassoffice

The subprime market came about as a result of finance capital trying to extract profit from every section of society. Capital was lent to those on little and no income at initially favourable rates. As lending rates increased many debtors were unable to repay their debts and the whole system collapsed like a deck of cards. It taught us a clear lesson about capital and markets – they will invade every section of society if allowed, and the results are not always good.

As the recession hit the need for short-term, affordable capital grew significantly and so did the profits of high cost lenders. In other words finance capital is now using the crisis that they created to make profits off of the backs of ordinary people.

High debt repayments affect the quality of life for households. The result is poorer diets, colder homes, rent, council tax and utility arrears, constraints on job-seeking behaviour, and poor health (including mental health), all of which present wider economic costs that have to be met by national and local government and create pressure on public services.

Around three million people use high cost lending in the UK, mainly because they have been let down by high street banks. With overdraft fees being excessive the very high cost certainties of payday lenders, home credit and pawnbrokers can seem attractive. The problem is that these markets are highly uncompetitive and price inelastic. Research carried out by Paul Jones at John Moore University shows that far from borrowing money to pay for luxury or non-essential goods, people on low incomes need credit just to get by. They know they are paying well over the odds for credit but have no choice but to pay the high prices charged.

Certain providers such as provident credit hold near monopoly positions. When the market fails and exploitation occurs then it is clear that the state needs to step in. The government has pledged to cap excessive rates on store and credit cards, why not other forms of credit? As the recession has hit the price of credit has actually increased not decreased. Caps will protect the public interest by limiting societal problems that arise from over-indebtedness just as they do in other countries such as France, Germany, Canada, Australia and some U.S states.

As well as capping the cost of credit there need to be affordable and viable alternatives to legal loan sharks, including greater support and funding for CDFIs and credit unions. A Post Bank created using the post office network could play a major role, a trusted institution providing affordable credit could wipe out the need for legal loan sharks.

At Compass we maintain that markets should be the servant of society. As Neil Jameson, Director of Citizens UK put it:

“Citizens UK have spent most of 2009 in conversation with thousands of members who confirmed the need for money to be controlled and for the reintroduction of anti-usury legislation as a reasonable response from civil society in light of the economic crisis.”

This campaign is about people fighting to control their lives in the face of overwhelming pressure from capital. To join the fightback, sign up to our campaign.