Borrowers are paying interest rates of up to 188 per cent to licensed moneylenders while having no idea of the charges they are paying, according to a report from the Financial Regulator.
Eighty per cent of people borrowing from a moneylender did not compare interest rates between lenders before taking out a loan and 71 per cent did not know the rate they were being charged, the report found.
Customers were more concerned about and more aware of the affordability of weekly repayments on loans rather than the overall cost of credit.
Although banks generally did not lend small amounts for short periods, credit unions offered similar loans to moneylenders at rates of just 12.6 per cent, the report points out.
In spite of the high cost of borrowing from a moneylender, the report found high levels of satisfaction with the 47 licensed operators in the State.
Half of those surveyed gave their moneylender a score of 10 out of 10 for efficiency, reliability and quality of service.
Making repayments did not pose difficulties for the vast majority - 84 per cent - of people who participated in the survey and more than 80 per cent planned to continue using the service.
More than 60 per cent said they were happy they could clear their debts but 23 per cent said they felt trapped by their use of credit.
The regulator plans to review its code of conduct for moneylenders to increase transparency about charges and provide more protection for consumers. However, the imposition of a ceiling on interest rates is not favoured because moneylenders might compensate by increasing the duration of the loan.
The survey did not cover the area of illegal moneylending, though 11 per cent of those interviewed said they were aware of unlicensed moneylenders operating in their area and one-third of licensed operators were aware of illegal competition.
The annual percentage rate of interest (APR) charged by moneylenders varied from 1.2 per cent to 188.5 per cent. Many lenders also charge a collection fee, ranging from three cent to 11 cent per euro lent.
The report points to a lack of competition in the sector to drive interest rates down, possibly because consumers are failing to shop around for the best deals on credit and because some may have difficulty in accessing other forms of credit.
However, the report admits that the APR of a loan may not be a meaningful measure of affordability for the small, short-term loans involved.
"Perhaps for relatively small loans over short periods of time, the benefits of these loans outweigh the cost of credit as measured by the APR."
One-third of people cited family events such as Christmas, weddings and communions as the reason for borrowing money, and 30 per cent said they used the loan to pay for clothes and household items.
The convenience of having the money delivered to the family home was seen as the main advantage offered by moneylenders, but many borrowers had long-established links with lenders.
There are about 300,000 customers of moneylenders, mostly for small, short-term loans ranging from €100-€4,000. Some 333 customers of moneylenders were interviewed by phone for the research.
Regulator's report: main points
• loans offered by moneylenders are "relatively expensive", with APRs of up to 188 per cent
• consumers tend to be unaware of the interest rates being charged but know their weekly repayments
• most borrowers are happy with the service provided by their moneylender
• loan sizes range from €100 to €4,000
• number of licensed moneylenders has dropped from 74 to 47 in last four years