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High Cost Credit

The term high cost credit is given to products which attract typical APRs of 50% or more. It covers products like home credit (also known as doorstep lending), unauthorised overdrafts or sub-prime personal loans, all of which are typically more expensive than mainstream credit, reflecting the flexibility of the product, cost of collecting the debts and the higher risk of default.

The Government remains committed to ensuring that vulnerable consumers are properly protected and not forced into the hands of illegal money lenders.

In 2004 the Department commissioned research into the effects of interest rate ceilings (also referred to as interest rate caps), with a view to understanding the likely impact of any introduction of rate ceilings in the UK.

The evidence in the report indicated that caps would be likely to restrict access to credit for sub-prime groups as specialist lenders stop offering certain products or increase other charges to compensate for the cap on interest rates. Those groups would run the risk of being denied access to legitimate sources of credit and might be driven to seek credit from the illegal sector, with exposure to much higher borrowing costs and potentially violent methods for obtaining repayment.

The Competition Commission specifically argued against interest rate caps in its home credit investigation in 2006 on the grounds that they could reduce the availability of home credit to the most vulnerable customers, specifically those with no access to alternative sources of credit.

However, it is important to review the evidence on this question and the OFT will be examining the experience of other countries that have introduced caps on interest rates as part of its review of high cost credit market.

OFT review of high cost credit market

The OFT is currently reviewing the consumer credit sector, focusing on high cost credit and whether competition in these markets is effective in current conditions. The review will identify: the level and drivers of competition in this market; the sources of suppliers’ revenue; the choices faced by consumers; and the factors that influence their decisions. It will look across a range of options available to consumers, including payday lending and home credit, and examine the impact that the current crisis is having on both suppliers and consumers. It will publish it emerging findings in December 2009 and its full report and recommendations in spring 2010.

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