GIOVENTU » Payday Loans in Italy and the UK

Payday Loans in Italy and the UK

Payday loans, originated in the US, have spread quickly in the UK market, representing at the moment a very controversial subject.

The loans are very expensive with very high rates of interest which are not regulated by law.

Payday loans allow customers to borrow a small amount of capital for a short term, often under two weeks on average or until "payday”. The payday loan can be more convenient than an overdraft, or some other sort of arranged loan, but the problem for a borrower starts if he or she cannot repay the loan as planned, and it gets extended, or rolled over.

One of the main reasons for the popularity of Payday loans is probably that in an uncertain economy mainstream credit options are less available for the customers, especially for young people who are dealing with uncertain employment prospects.

Payday loans are not so popular in Italy. Even though unemployment and the financial crisis increased the average of the Italian families’ debt by +33% from 2009 (Cgia data), people don’t even know what they are and Italians still prefer to borrow money from the banks or they choose illegal options.

There are no official figures on how many people use this sort of borrowing in the UK. According to the Office of fair trading as much as £1.8bn a year may be lent by payday lenders.

In the UK any lender, whether it be a big high Street bank or a one-outlet payday loan shop needs a consumer credit licence from the Office of Fair Trading (OFT).

There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans but the advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations. 

At the moment only a self-imposed voluntary code exists.

Lenders who belong to trade associations have signed up to a maximum limit of three rollovers on any loan. Customers who need to get their financial affairs in order have 30 days time to do that and anyone in financial hardship can benefit of the immediate freezing of interest.

In Italy, to tackle the dangers of the usury phenomenon, the Parliament approved the law 108/96, which has better defined the crime of usury and increased penalties for those who commit it, including the confiscation of the goods of the usurer. Under usury laws contracts which bear exploitative interest rates (generally above 15%-20%) cannot be enforced in law. Repeat offenders, who try it, get a prison sentence. Usury laws protect the socially weak, uneducated, desolate and weak-willed from predators.

 

In Italy it can be considered usury to grant a loan at a higher interest rate then the "cap rate", which is obtained by increasing by 50% the average rates of charge of the various types of lending, calculated every three months by the Treasury and published in the Official Gazette.

The UK government has recently agreed to change the law to give the new Financial Conduct Authority (FCA) powers to set a cap on exorbitant interest rates charged on payday loans.

One of the main concerns which has emerged is that this could cause reduced access to credit for the poorest and most vulnerable consumers and even drive them to illegal loan sharks.

Giulia Lombardo and Peter Ciccone

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