The number of Britons seeking advice on bankruptcy could rise substantially if payday loans are banned – or even if measures are taken to place a cap on the punitive interest rates typically charged.
According to the Institute of Economic Affairs, similar measures in other EU countries, including France and Germany, led to “financial breakdowns” among the poor.
This saw five times as many French and German borrowers seeking advice on bankruptcy as is typically the case in the UK.
“We should be very careful what we wish for before heavily regulating payday loans,” says IEA director general Mark Littlewood.
“We risk harming the very people we intend to help – the poor.”
Payday loans are designed for short-term borrowing and, while their annualised APR interest rate is often a four-figure percentage, the total cost of a loan can be relatively low if it is repaid promptly as intended.
While there are real concerns about lenders approving loans for customers who have no realistic way of repaying the full amount, as well as a lack of competition on interest rates in the sector, it is clear that any moves to tackle such issues must be carefully thought out, to avoid a spike in personal insolvencies in the years to come.