Analysis: There are around 288,000 high cost customer loans in Ireland which are subject to extremely high interest rates
By Olive McCarthy and Noreen Byrne, UCC
In 2022, the Consumer Credit (Amendment) Act was enacted to place a cap on the interest rate that can be charged on moneylender loans. In simple interest terms, this resulted in a cap of 1% loan interest per week, to a maximum charge of 48% per annum. This translates into a maximum allowable APR of 152.35%. In effect, this reduced the maximum cost of moneylending credit from c.188% APR, or c.288% APR where collection charges (which are no longer permitted) were included.
Despite this reduction, the allowable interest rate remains extremely high compared to other forms of credit, but is said to be justified by the higher risk profile of the typical borrower and the administrative costs of smaller loans. Fittingly, the Act changed the name of this form of credit to 'high cost credit' in the interests of consumer protection.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Brainstorm, 3 common traps to avoid with loans and credit
According to the Central Bank of Ireland, high cost credit is defined as any form of credit offered in excess of 23% APR. This includes cash loans, the provision of goods on credit from a cash loan firm, the provision of electrical goods on credit from a retailer, the purchase of goods on credit from a website/catalogue or credit to pay for an insurance premium.
We previously outlined some of the reasons why people borrow from high cost credit providers. These can include family tradition, convenience, direct marketing, poor credit history, habit and lack of choice, all of which can desensitize the borrower to the cost. The main argument used against the imposition of an interest rate cap on high cost credit is the fear that it will reduce the availability of credit. An exodus of high cost credit providers would potentially leave more vulnerable consumers financially excluded, particularly those dependent on high cost credit who have no alternatives, and would thereby fuel illegal moneylending.
A recent review by the Central Bank of the impact of the interest rate cap on high cost credit introduced by the 2022 Act tells us that there are around 288,000 high cost customer loans in Ireland of which 31,000 are high cost cash loan accounts (typically a small personal loan). Most cash loans are reported as charging the maximum allowable APR of 152.35%, with the average loan size being in the region of €1,000. The imposition of the cap is reported not to have reduced the supply of credit.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Radio 1's News At One, RTÉ Consumer Affairs Correspondent Aengus Cox reports that the Central Bank has published a new consumer protection code aimed at modernising the set of rules that businesses must abide by when dealing with consumers
The report concludes that the high cost credit sector plays ‘an important role in financial inclusion through the provision of credit to those who may otherwise not be able to access credit from other mainstream providers’. While there is agreement that high cost credit gives access to those who may not otherwise have it, we must now look to ensuring that alternative, lower cost approaches are widely available and accessible. These will give people choice and contribute to long term financial inclusion which, according to the World Bank, means access to and use of affordable financial products and services.
Credit designed to offer alternatives to high cost offerings is traditionally provided by community-based financial institutions such as credit unions and community development finance institutions. Credit unions across the globe have typically been established to offer affordable financial services in the face of so-called loan sharks and high cost moneylending and to promote financial inclusion. Community Development Credit Unions in the US focus specifically on low and moderate income communities, serving those excluded from the mainstream financial system.
Community development finance institutions include Fair For You in the UK, which supports financially-excluded families to ‘buy essential household items, avoid hardship, and build their financial resilience. It aims to be a fair and affordable alternative to high cost credit and unregulated lenders’. These institutions can lend to people with lower credit scores because they aren’t regulated in the same way as more typical financial institutions.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From
Consumers worried about economic outlook and still dealing with cost-o..." data-description="Economist Austin Hughes on the latest findings from the Credit Union Consumer Sentiment Index."
XXXX
In Ireland, cash loans are available from banks and credit unions, although banks typically don’t offer amounts of less than €1,000 - or less than €2,000 in one case - unlike credit unions. Access to loans specifically designed to give people alternatives to high cost credit is more limited. About half of all credit unions offer the It Makes Sense Loan, a small loan at standard interest rates for people who are in receipt of social welfare payments and which aim directly to reduce dependence on high cost credit and rebuild credit records. There are currently about 5,000 such loans.
Under the Credit Union (Amendment) Act 2023, the maximum loan interest rate that can be charged by credit unions, currently 12.67% APR, can be increased by ministerial order. No change has yet been sought but 2023 research on small loans highlights the potential of a change ‘to enable credit unions to offer a wider range of lending products to their members and communities’.
Policy makers must move beyond accepting the necessity of high cost credit as a given and design better access to more just and affordable credit options
In 1977, the US passed the Community Reinvestment Act to address inequities in access to credit. This was designed to encourage financial institutions (typically banks) to help meet the credit needs of everyone in their communities, including those with low and moderate income. It was also designed to overcome redlining, a practice that denies financial or other essential services based on where people live. Federal banking regulators monitor the performance of financial institutions under this act. Although impact has been reported as mixed, the act demonstrates the possibility of mandating financial institutions to play a part in making affordable credit available to all, including people who may otherwise resort to high cost options.
In Ireland, we urgently need to move beyond accepting the necessity of high cost credit as a given and design wide-ranging access to more just and affordable credit options that build financial inclusion. This calls for creative thinking, open dialogue and serious engagement across a broad range of stakeholders who are willing to challenge the status quo. Where there’s a will, there’s a way.
Follow RTÉ Brainstorm on WhatsApp and Instagram for more stories and updates
Prof Olive McCarthy is a professor in the Department of Food Business and Development and a senior researcher with the Centre for Co-operative Studies at the Cork University Business School at UCC. She is a former Research Ireland awardee. Dr. Noreen Byrne is a senior lecturer in Food Business and Development and Director of the Centre for Co-operative Studies at the Cork University Business School at UCC.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
