Analysis: there are many reasons why people continue to use moneylenders despite exorbitant interest rate

Byrne, Noreen

McCarthy, Olive

Cork Open Research Archive

UCC Library and UCC researchers have made this item openly available.Please let us know how this has helped you. Thanks!Title Moneylending in Ireland: '€70m in interest payments annually'Author(s) McCarthy, Olive; Byrne, NoreenPublication date 2021-02-24Original citation McCarthy, O. and Byrne, N. (2021) 'Moneylending in Ireland: '€70m ininterest payments annually’’, RTÉ Brainstorm, 24 February. Availableat: https://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/Type of publication Article (non peer-reviewed)Link to publisher'sversionhttps://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/Access to the full text of the published version may require asubscription.Rights © 2021, RTÉ Brainstorm; Olive McCarthy and Noreen Byrne. Thisarticle is made available under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Ireland (CC BY-NC-ND 3.0 IE)license.https://creativecommons.org/licenses/by-nc-nd/3.0/ie/Item downloadedfromhttp://hdl.handle.net/10468/12446Downloaded on 2022-05-18T20:16:20Z21/01/2022, 12:20 Moneylending in Ireland: '€70m in interest payments annually'https://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/# 1/4Updated / Wednesday, 24 Feb 2021 15:45Analysis: there are many reasons why people continue to use moneylenders despiteexorbitant interest rates By Olive McCarthy and Noreen Byrne, UCCIn late 2018, a bill was passed to cap the rate of interest that can be charged by licensedmoneylenders in Ireland at 36% APR. This came a mere two weeks after the launch of ourreport, funded by the Social Finance Foundation and the Central Bank of Ireland, into interestrate restrictions on high cost credit. What became known as the 'UCC Report' was debatedextensively in the Dail in support of the Bill. Since then, a public consultation by theDepartment of Finance on the matter of an interest rate cap took place in summer 2019, theresults of which are awaited, and scrutiny of the Bill is currently underway in the Oireachtas.Moneylenders licensed by the Central Bank can charge up to 188% APR on loans, rising to288% APR including collection charges. Most loans are small, in the region of €550. Comparedto more affordable borrowing alternatives such as credit unions, who cannot legally chargemore than 12.67% APR, the interest differential is dif cult to justify. Why, then, do peoplecontinue to borrow from moneylenders?Moneylending in Ireland: '€70m in interest payments annually'"Moneylenders licensed by the Central Bank can charge up to 188% APR on loans, rising to 288% APR including collectioncharges"21/01/2022, 12:20 Moneylending in Ireland: '€70m in interest payments annually'https://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/# 2/4Moneylending customers are often seen to be those who can least afford the high interestcosts. The Central Bank published a report in 2013 pro ling the typical moneylendingcustomer which it found to be female, aged 35-54 and from a lower socio-economic grouping.A key difference in  ndings from the 2013 report and a similar report conducted in 2007, wasan increase from 41% to 53% in the use of moneylenders by those who own their own homesoutright or who have mortgages.From RTÉ Radio 1's Morning Ireland in June 2020, Grainne McEvoy, Director of ConsumerProtection with the Central Bank, on new rules for moneylenders aimed at protectingconsumersThe reasons people continue to borrow from moneylenders are multi-faceted and oftenreduce the sensitivity of the borrower to the cost. These might include family tradition,convenience, direct marketing, poor credit history and habit.However, credit unions and others are reporting evidence of ‘client creep’ into groups ofconsumers on higher incomes who are struggling to cope  nancially, particularly since the last nancial crisis. This has become more evident following the inclusion of licensedmoneylenders in the Central Credit Register in 2018 for loans in excess of €500. Researchcited by the Social Finance Foundation suggests that only 12% of moneylending customersare unemployed, while 43% are in higher income brackets. An updating of the Central Bank’s2013 report is urgently needed to understand fully how borrower pro les are changing.A number of welcome regulatory changes to how moneylenders can operate have been madeby the Central Bank, most recently those announced in June 2020. Moneylenders are requiredto include prominent, high cost warnings on all advertisements and must prompt consumersto consider alternatives. They must also encourage consumers to consider if a moneylendingloan is their best option and, where the loan is required for basic needs, direct consumerstowards MABS, the Money Advice and Budgeting Service.21/01/2022, 12:20 Moneylending in Ireland: '€70m in interest payments annually'https://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/# 3/4From RTÉ Radio 1's Drivetime, Michelle O'Hara from Money Advice and BudgetingService about the increase in calls to their helpline during the pandemicThe effectiveness of consumer warnings on  nancial products is debated because  nancialconsumers act on the basis of ingrained  nancial habits and inertia and often suffer fromdecision regret. Ultimately, imposing a cap on the cost of credit will serve the interests ofconsumers best but can only be achieved through legislative change.The main argument used against interest rate caps on high cost credit is the fear that apotential reduction in the availability of credit will fuel illegal moneylending. The reportedevidence appears to be weak, particularly in a context of widely available alternatives. CitizensAdvice UK reported in 2017 that the introduction of a cap on payday loans in 2014 did notresult in a shift to illegal moneylenders. Recent research we have conducted with socialhousing residents, due to be launched later this year, demonstrates that those on low incomesemploy a wide range of coping strategies when they run out of money.The impact of moneylending as a  nancial drain on communities is worth measuring. Usingvery limited data, which the Central Bank made available in 2017 on average loan size andmost frequent loan term, we calculate conservatively that a minimum of €70 million in interestpayments drain out of communities across Ireland to moneylenders annually, although weestimate that it is likely to be anywhere up to 2.4 times this amount. Thinking of communitywealth depletion in this way is sobering.21/01/2022, 12:20 Moneylending in Ireland: '€70m in interest payments annually'https://www.rte.ie/brainstorm/2021/0224/1199025-moneylenders-ireland/# 4/4From RTÉ Archives, Tom MacSweeney reports for RTÉ News in 1990 on moneylendingcompanies challenged in court on the grounds that they charge too much interest.In Europe, a clear trend towards the use of interest rate restrictions as a policy tool is evident,with 21 member states now having some form of cap on high cost credit. Our report calls forthe currently permitted usurious rates of interest to be prohibited.To be effective, an interest rate restriction would have to be coupled with limits on other feesand charges and a cap on the total cost of credit. Political will to enact the legislation that willintroduce a target interest rate cap for high-cost moneylending credit is growing. This capmust be implemented through a series of interim interest rate reductions, allowing time formoneylenders to adjust their business model and for consumers to transition to moreaffordable sources of credit. This legislative change is an essential  rst step to building more nancially secure communities. Now is the time to act.  Dr Olive McCarthy is a senior lecturer with the Department of Food Business andDevelopment and Director of the Centre for Co-operative Studies at the Cork UniversityBusiness School at UCC. Dr Noreen Byrne is a lecturer at the Department of Food Businessand Development and a researcher at the Centre for Co-operative Studies at the CorkUniversity Business School at UCCThe views expressed here are those of the author and do not represent or reflect the viewsof RTÉArticle printed from RTE.ie01:38Privacy

Moneylending in Ireland: '€70m in interest payments annually'

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Moneylending in Ireland: '€70m in interest payments annually'

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