The Minister for Finance and Personal Expenditure and Reform, Paschal Donohoe, has begun investigating the idea of capping interest rates moneylenders can charge. The discussion of capping maximum interest rates has been brought up by the fact that moneylenders can charge insanely high percent annually on small loans. In other words, any licensed moneylender is able to set their own interest rate. There has been a recent push onto the Minister for Finance to create a interest cap on loans.
Why is the ability for licensed moneylenders to set their own interest rates an issue ? Interest rates determine the price at which individuals can borrow money. The higher the interest rate the more expensive it becomes to borrow money. The higher the cost of money the more difficult it becomes to borrow money and thus discourages investment. Ultimately, ability to set extremely high interest rates means borrowers will be paying a high price for money. The higher the interest rate set by a moneylender the higher the lenders profit will be.
In comparison most countries in the European Union have interest caps on high priced credit. Twenty one of the twenty eight countries in the EU participate in capping interest rates for loans. These nations include Germany, France and Italy. Germany established that interest rates that are more than double the market rate of interest completely lack moral legitimacy of providing credit to poorer individuals that need it.
However, the connotation of having higher interest rates equating to poor borrowing conditions is not always disadvantageous. If the economy is booming and their is a growing demand for loans, businesses and individuals will be willing to pay higher interest loans. Banks are able to create more profit margin from these loans and the economy can continue to progress.
The ultimate question is should Ireland have concerns about introducing a interest cap on loans? The group of individuals attaining these loans that have extremely high interest rates are mainly women who come from poorly educated and impoverished areas. Fear associated with instilling a new regulation on interest rates is the fact that availability of credit may decline. Decrease in supply of credit could then lead to an increase in illegal moneylending.
The Central Bank already regulates the registration of moneylenders. Thus the Central Bank will not register a lender charging staggering interest rates. The existing system for registering lenders serves as a cap in itself.