What's kinder here?

I have a lot of instinctive sympathy for Stella Creasy's campaign against legal loan-sharking, which I first heard about back in February. It seems monstrous that it can be legal for money lenders to charge interest of 2,500% a.p.r.. It's all too easy for a small loan to transmogrify into an enormous unpayable burden by the wondrous power of compound interest. At a time when people are inevitably going to be feeling the pinch, and reports are that more and more are considering this sort of short-term, high-interest loan surely Something Must Be Done?

Um. Well. Quite. But, over and above this instinctive cri de coeur, something nags at me (and did from the first).  Let's look at why interest rates on payday loans tend to be so high. Firstly, they are intended to be very short-term loans for relatively small sums. Poor old Joanna Bloggs has to pay £10 to borrow £100 for a week (figures being purely illustrative here). This works out as an a.p.r. of 521% - which seems very high. Arguably, though, a.p.r. isn't a terribly helpful way of measuring a weekly loan. If, instead of borrowing the cash from Honest Bob, Joanna had gone £100 over her overdraft limit (assuming she has one of course), the bank would have charged her £35 for the privilege, which works out as over 1800% a.p.r..

The other reason that charges for these loans is high, obviously, is default risk. Why can't Joanna just borrow the money from the bank? Because, by and large, she can't. The reason she can't is because she's too bad a risk for the bank to make - especially in these days of higher capital adequacy ratios. There are, in short, perfectly good reasons why payday loans are so extortionate, even beyond the fact that the lenders are bastards. Even so, the emotional response is clear - it's not fair that such rates should be charged, and they should be capped, even if the result is that payday loans effectively vanish.

Fine, so we abolish legal loan-sharking. Job done, and we can all feel that nice warm glow of a good job well done. But hang on a minute - all we've done is addressed the supply side of this problem. Joanna still needs that £100 - to fix her boiler, or get her car past its MOT or whatever. We've just ruled out a payday loan, and the bank's are still not going to lend to her. Where does she go now? Is illegal loan-sharking really so much better? Isn't 'You may lose your house' a qualitatively better sort of warning that 'You may lose your fingers'?

The problem I have with this proposal, therefore, is not that I disagree with its aims, but that I worry that it will fail to achieve those aims, and may even make the problem worse. After all, we do have some empirical data on what happens when Governments try to deal with a social problem by prohibiting supply and ignoring demand.