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Short term loan market working OK: OFT

16 June 2010

There is no need for capped charges on short term loans, according to the Office of Fair Trading.

Following a review of the pawnbroking, payday loan and home credit markets begun last July, the competition watchdog said that although such borrowing was expensive, it met a need for people who could not otherwise borrow money.

It added that if the Government thought there was a problem, it should take action itself. However it found that "In a number of respects, these markets work reasonably well in that they serve borrowers not catered for by mainstream suppliers, complaint levels are low, and there is evidence that for some products, lenders do not levy charges on customers who miss payments or make payments late."

High costs

Such lending was necessarily expensive because of relatively high administration and collection costs, the sums typically borrowed were low, and there was a high incidence of missed or late repayments.

If price controls were introduced, loans might become more difficult to ontain, and some lenders might introduce other charges such as late payment fees.

The OFT recommends that a price comparison website for these types of loans be set up - while recognising that borrowers tended to focus on how quickly and easily they could get credit and afford repayments, rather than the overall cost.

It also considers that the Government should consider introducing "wealth warnings" on loan adverts. If the Government wanted to reduce dependence on these markets, it should try to persuade banks and building societies to expand their lending, or extend its own social fund.

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