It is extremely unfortunate that doorstep lenders, pay day loans and loan sharks can often feel like the only option for people who are desperate and aren't able to access more affordable finance. We've all seen the shocking adverts on TV for loans at an APR of over 2,000%. It is extremely easy for people to get in huge trouble borrowing like that. The Government's newly announced My Home Finance scheme aims to give people another option by providing loans at 30% APR, the Guardian reports that:
"The scheme My Home Finance, run in collaboration with the Royal Bank of Scotland, 26 housing associations and the Wates Foundation, will provide loans charging a typical APR of 29.9%, comparing very favourably to the rates charged by doorstep and pay-day lenders, which can range from 200% to 2,000%. Loans of around £500 will usually last for a year, but borrowers can select a shorter or longer term if preferred."
Getting Government into the risky lending business, what could possibly go wrong? There are a number of potential issues with this proposal, including:
- My Home Finance is being run through a single bank, not a number of them competing. That is much too close to crony capitalism for comfort; it is anti-competitive for government to partner with certain organisations, to promote certain products like this. They are even going to sign people up to RBS bank accounts. The use of just one firm also raises further questions. Did the Government look for other providers to make the scheme competitive? If not, why not? If they did, why did the others say no? RBS haven't covered themselves in glory making risky loans recently. Look how exposed they were to Dubai.
- Are these loans limited to those actually using payday or loan shark finance? They don't seem to be. Plenty of people who wouldn't borrow from loan sharks or dodgy services advertised on the TV might borrow from a scheme like this if it gets the HM Government badge of approval. The whole scheme would be counter productive if it just meant a lot more people taking still very expensive 30% APR loans (after all, credit card borrowing is bad news and that is normally at around 20% APR). On the other hand, if the scheme is limited to those in real trouble you risk moral hazard as people considering taking a high interest loan think My Home Finance will look after them if things go wrong, that could encourage more risky borrowing.
All that doesn't mean that there isn't a genuine problem, and some people aren't winding up in truly desperate circumstance. But the risks will mount if this scheme grows and starts lending more, to more people. We will need to keep a careful eye on it.
It is extremely unfortunate that doorstep lenders, pay day loans and loan sharks can often feel like the only option for people who are desperate and aren't able to access more affordable finance. We've all seen the shocking adverts on TV for loans at an APR of over 2,000%. It is extremely easy for people to get in huge trouble borrowing like that. The Government's newly announced My Home Finance scheme aims to give people another option by providing loans at 30% APR, the Guardian reports that:
"The scheme My Home Finance, run in collaboration with the Royal Bank of Scotland, 26 housing associations and the Wates Foundation, will provide loans charging a typical APR of 29.9%, comparing very favourably to the rates charged by doorstep and pay-day lenders, which can range from 200% to 2,000%. Loans of around £500 will usually last for a year, but borrowers can select a shorter or longer term if preferred."
Getting Government into the risky lending business, what could possibly go wrong? There are a number of potential issues with this proposal, including:
- My Home Finance is being run through a single bank, not a number of them competing. That is much too close to crony capitalism for comfort; it is anti-competitive for government to partner with certain organisations, to promote certain products like this. They are even going to sign people up to RBS bank accounts. The use of just one firm also raises further questions. Did the Government look for other providers to make the scheme competitive? If not, why not? If they did, why did the others say no? RBS haven't covered themselves in glory making risky loans recently. Look how exposed they were to Dubai.
- Are these loans limited to those actually using payday or loan shark finance? They don't seem to be. Plenty of people who wouldn't borrow from loan sharks or dodgy services advertised on the TV might borrow from a scheme like this if it gets the HM Government badge of approval. The whole scheme would be counter productive if it just meant a lot more people taking still very expensive 30% APR loans (after all, credit card borrowing is bad news and that is normally at around 20% APR). On the other hand, if the scheme is limited to those in real trouble you risk moral hazard as people considering taking a high interest loan think My Home Finance will look after them if things go wrong, that could encourage more risky borrowing.
All that doesn't mean that there isn't a genuine problem, and some people aren't winding up in truly desperate circumstance. But the risks will mount if this scheme grows and starts lending more, to more people. We will need to keep a careful eye on it.