Who are the ‘loan sharks’ charging 800,000% interest? That’s right- the High Street Banks…
Finding Christmas a stretch for your pocket? Worrying how you can afford that new computer console/ 46” 3D TV/ chunky gold ‘chain’ you absolutely can’t live without? Don’t worry, all you need to do is turn on your current (44”) TV and take the details of one of the searingly helpful short-term (payday) loan providers advertising quick and easy cash. Or, you could go down to your local dodgy Estate/Pub/Car Park and find one of those nice men accompanied by Big Strong Men who will lend you money at even more ‘reasonable’ rates.
Of course we are kidding- if you are a little over-stretched this Christmas, and let’s face it most of us are, with reports that people are either selling off last year’s pressies or turning off the heating in order to fund it, you wouldn’t dream of going to a payday loan company or loan shark would you? They charge ridiculous rates of interest and won’t listen to pleas for sanity…
However, new research from the BBC has compared the rates charged by payday lenders and some High Street banks and found that the annualised percentage rate (APR) charged for borrowing £100 over 28 days varied from 969% to 819,100%. And the worst culprits are not the payday loan companies, but High Street banks whose customers go over their overdraft limit.
For example, a customer borrowing £100 for 28 days without the consent of Santander would repay £200, for example which gives an equivalent APR of 819,100%. No payday loan lender charged an APR of more than 5,000% but three banks – Santander, Barclays and Lloyds TSB - charged an equivalent APR of more than 300,000%. Barclays even charge a customer using a pre-agreed emergency borrowing facility - £22 for every five consecutive working days they are in it, meaning customers pay £88 on top of the £100 capital after 28 days - an equivalent APR of 366,000%.
Eric Leenders (seriously, this is his actual name and he isn’t even from Happy Families), from the British Banking Association, said that the industry was “willing to look at concerns” but complained that using APRs to calculate the cost of unauthorised borrowing was a "mathematical manipulation". Santander told the BBC: "It's is confusing to compare payday loans with overdrafts on current accounts because an unauthorised overdraft charge is for unauthorised use of a current account while a payday loan is an agreed loan facility."
Mike Dailly, from the Govan Law Centre, said the government must review unauthorised overdraft charges. "What we've got here is banks with equivalent APRs of nearly one million percent. It really is eye-watering."
The Citizens Advice Bureau thinks it is too easy to obtain ‘Payday’ credit and has called for tighter regulation. However, Consumer Minister Ed Davey believes that tougher measures could push people into the hands of illegal loan sharks. As opposed to the legal ones on the High Street.
Last month, the Department for Business, Innovation and Skills (BIS) published a report on consumer credit, expressing concern over the Payday market, which said that commitments made by High Street banks will "deliver a fairer, more competitive market and mark a real improvement for consumers". Yeah, right.
How can they be allowed to do this?
Well, in 2009, UK banks won a Supreme Court case that had been brought to challenge the legality of large overdraft charges. The case found that bank customers effectively ‘agreed’ to pay overdraft charges as part of the price of having a current account, so they fell outside the scope of the 1999 consumer contract regulations.
Nevertheless, in the aftermath of the ruling, most banks did agree to reduce the level of their charges, but although the amount of charges have been reduced in some cases, the number of times a customer can be charged in one month has gone up.
Furthermore, the OFT said that under the Consumer Credit Regulations Act of 2010, businesses do not need to state an APR for "any charges payable due to non-compliance with commitments contained in the consumer credit agreement".
As a result, the maximum charged for borrowing £100 for 28 days from a payday loan company is £42. This would generate unauthorised borrowing charges of £100 with Santander, £88 with Barclays and £86 with Lloyds TSB for the same sum of money over the same period.
Defenders of the charges claim that unauthorised overdraft borrowing is like ‘stealing’, and the charges are therefore intended as a deterrent. However, others claim banks should treat direct debits that are not covered in the same way as a request for cash from a cash point*, and refuse to pay out. Although that would prevent them levying daily charges on top of a refusal fee, so they probably won’t go for it…
* definitely not a Cashpoint as that term is trademarked by LloydsTSB Plc.