Interest rate restrictions needed to protect vulnerable borrowers, UCC experts warn Oireachtas
The highest rate currently being charged by licensed moneylenders is 187% Annual Percentage Rate (APR). Picture: Press Association
Ireland’s current moneylending system is unfair, depletes the wealth of the most vulnerable communities, and keeps many trapped in persistent indebtedness, experts have warned the Oireachtas’ Finance Committee.
Dr Olive McCarthy and Dr Noreen Byrne of University College Cork (UCC) told TDs and Senators on Tuesday that interest rate restrictions would be required to prevent moneylenders from hitting at-risk borrowers with exorbitant costs.
Dr McCarthy and Dr Byrne, who have conducted research in this area at UCC’s Centre for Co-operative Studies, presented their findings to the members of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform.
The academics study, titled ‘Interest Rate Restrictions on Credit for Low-income Borrowers,' recommends that the Government “prohibit the currently usurious rates of interest which licensed moneylenders are permitted to charge”.
In order for an interest rate restriction to be effective, the report said, it would have to be “coupled with restrictions on other fees and charges and a limit on the total cost of credit”.
The report recommends “a redoubling of efforts” to promote financial inclusion and education initiatives to support consumers in making better financial choices, especially where household resources are limited.
Dr McCarthy and Dr Byrne said their research had found there was “weak evidence" to support the claim that the imposition of an interest rate cap for licensed moneylenders would lead to a reduction in the availability of credit, which in turn would fuel illegal moneylending.
“Recent research we have conducted with social housing residents, due to be launched later this year, demonstrates that those on low incomes employ a wide range of coping strategies when they run out of money,” they said.
The highest rate currently being charged by licensed moneylenders is 187% Annual Percentage Rate (APR). This doesn’t include collection charges, which can raise the APR to 287%.
The experts advised a phased approach to restricting interest rates towards a targeted level.
“We recommend that, following agreement on the ultimate target cap, an incremental introduction of interest rate restrictions takes place to allow for a phasing out of high interest rates over an agreed period of time,” they said.
They told the committee that such a measure would “facilitate the adjustment of all parties, the implementation of other supportive policy/legislative measures and fine tuning in light of developments on the ground, until the final target is reached. “It is important that the first move be the introduction of an interim rate, to develop momentum.
“Otherwise, the status quo remains. It is envisaged that this first interim rate restriction will prompt a re-examination of the moneylending business model,” they added.
Dr McCarthy and Dr Byrne's full study can be found here.
