‘Rent-to-own’ shops that sell appliances and furniture for small weekly payments but with a high interest rate face a price cap.
The Financial Conduct Authority (FCA) has spent nearly two years looking at the cost of high interest borrowing.
It has now outlined a package of plans for rent-to-own, doorstep lending and catalogue shopping.
High-cost credit is used by three million people in the UK.
Single-parents aged 18 to 34 are three times more likely to have a high-cost loan – such as a payday loan, doorstep loan or pawnbroking loan – than the national average.
“The proposals will benefit overdraft and high-cost credit users, re-balancing in the favour of the customer,” said FCA chief executive Andrew Bailey.
About 400,000 people have outstanding debt with rent-to-own firms such as BrightHouse from which they buy household appliances, paying the money back over three years.
After interest, they can end up paying more than double the cost price.
The FCA said it had seen cases when people had ended up paying more than £1,500 for essentials like an electric cooker that could be bought on the high street for less than £300.
“The FCA believes the harm identified in this market is sufficient in principle to consider a cap on rent-to-own prices. It will now carry out the detailed assessment of the impact that a cap could have on the rent-on-own sector and how it might be structured,” the regulator said.
Such a cap would not be in place before April 2019.
How Celtic Credit Union compares
One deal for a fridge-freezer under a rent-to-own was highlighted by the FCA:
- Price of the fridge-freezer on the High Street: £250
- Cost price from a rent-to-own company: £464
- 156 weekly payments including add-ons (such as a warranty): £7.96 per week
- Total cost without add-ons: £928
- Total cost with add-ons: £1,242
If you borrowed £250 from Celtic Credit Union, the maximum interest you would repay over 156 weeks would be £159.11 Total repayable £409.11 – that’s over £800 cheaper!
Although we would discourage borrowers from borrowing a small loan, and repaying it over such a long term as 5 years. The longer the term, the more interest repayable. If that same £250 were borrowed over a shorter period it would be even cheaper.
Original article from the BBC website: http://www.bbc.co.uk/news/business-44307663