Loan firms charging excessive interest rates could be barred from opening shops in Hackney if council proposals are implemented.
Payday lending has become a booming industry that offers short-term loans at high rates of interest, often advertising APRs above 2,000 per cent.
The number of companies offering these services has increased fourfold since the recession began. Critics accuse them of targeting the poor and trapping them in cycles of debt, with Labour MP Stella Creasy dubbing them “legal loan sharks”.
Concerned with the growing number of such businesses, Hackney councillor Ian Rathbone called on the Government to give local authorities the power to veto licenses where they could have negative economic or social impacts on communities.
Mr Rathbone also backed a campaign for a cap on credit.
He said: “Payday loans are terrible. People don’t realise they’ve got to pay more and more each time, until eventually it overtakes their pay.
“Once that happens, they’re in permanent debt.”
Research carried out by Paul Jones, senior lecturer at the research unit for financial inclusion at Liverpool’s John Moores University, found people on low incomes borrow money just to get by.
“They’re not borrowing the money for luxury goods, but in order to survive,” Mr Rathbone said. “This is a real blight on our society.”
However, Terry Gilligan of The Money Shop, a high street credit agency, said it provides an essential service. “If Hackney Council were to prevent responsible payday lenders such as The Money Shop from operating the likelihood is that people would turn to illegal loan sharks, which could have devastating consequences,” he said.
John Lamidey, chief executive of the Consumer Finance Association, which represents payday loan companies, denies that its members act like legal loan sharks and said they only lend money to people who can afford it.
“The real problem is people sniping from the sidelines who are deliberately misrepresenting the facts,” he said.
Mr Lamidey says annual percentage rates (APRs) are misleading as they are what the loan would cost over a year, which leads to confusion. “The problem with APR is that it was invented by regulators a long time ago when the credit market was different,” he said. “We’re required by law to display it, but it doesn’t have any relation to the amount of the money you’re going to pay back – our members always make that very clear.”
In a recent report on payday lending, accountancy firm PwC said working out the APR on a short-term loan would be the same as working out the annual cost of renting a car you only wanted for a few days.
But Mr Rathbone believes more must be done to promote financial literacy so people are aware of the “grim realities” of borrowing from payday loan companies.
He said: “People need help and advice because they’re up against extremely cunning, wily businesses that are completely unscrupulous in the way they operate.”
One solution, he said, is setting up an account with a credit union, which offers its members affordable and flexible credit.
The London Community Credit Union (LCCU) on Mare Street opened last month, after the previous Hackney Credit Union was shut down last July by the Financial Services Authority.
Credit unions are similar to traditional building societies – only lending money they have – so they need to encourage their members to open savings accounts.
Mahbub Chowdhury, manager of the LCCU, said: “We want our local community to be aware of the benefits that we can bring to their savings, and for us to grow we need more people to join the organisation.”
