A moneylender offers small personal loans at high rates of interest, usually higher rates than the market rate charged on credit cards or on bank overdrafts. Moneylenders are an important source of credit to a category of borrowers who would normally be refused credit by most financial institutions because their income may be at or below the poverty threshold or whose credit score indicates that the borrower might be unable to repay the loan. Because personal loans offered are unsecured and the risk of default by the borrower is high, moneylenders charge an effective interest rate that is in the range anywhere between 100% to 400% APR. .

Historical meaning

The historic use of the term moneylender refers to a person who as charges a fee for the use of money (i.e. a usuror).

Moneylending in the UK

In the UK, the moneylending sector is currently referred to as Home Collected Credit (HCC), reflecting the fact that loans and subsequent repayments are made and collected in person by moneylenders or their agents at their customers doorsteps. The largest lender in this sector is Provident Financial, which has 1.5m customers out of a total of 2.5 million people who borrow from HCC providers, giving the company about 60% market share. In 2005, home credit lenders lent £1.3-2.3bn and collected £1.8bn in repayments.

Competition Commission inquiry

In 2006, the Competition Commission published a report into their public inquiry into the home collected credit market, which accused Provident Financial of making profits in excess of what could be justified by their costs. Provident disputes this allegation. They estimated that in the industry as a whole, profits of £75 million over the cost of capital were made each year from 2000-05. They also stated that home credit lenders were not competitive on price, partly because demand was not sensitive to changes in price.

Regulation

Moneylenders in the United Kingdom are regulated by the Office of Fair Trading, and must be licenced to lend money under the Consumer Credit Act 1974.

Moneylenders who are unregulated, engage in predatory lending or seek to enforce loan agreements by illegal means such as extortion are commonly referred to as loan sharks.

See also

• Usury
• Microfinance
• Sarakin - the Japanese term for moneylender.

References