Payday lenders face new profit tax
Lenders such as Wonga face a possible 10% tax on profits under a Labour crackdown on payday lenders.
Ed Miliband has vowed to "call time" on the "exorbitant" interest rates charged by some firms, which can see borrowers end up paying thousands for loans that were initially in the low hundreds.
A Labour government would impose a new levy on payday lenders to fund a multimillion-pound increase in public support for low-cost alternatives, such as credit unions.
It aims to raise enough cash to double the £13 million currently provided by the Government each year to fund the expansion of credit unions.
Although no figure or method for imposing the levy has yet been decided upon, Labour sources said a tax on profits would need to be set at 10% to meet that target.
There are around 250 payday lenders but Wonga is the largest and makes around £60 million a year.
Mr Miliband said: "We've got a cost of living crisis in this country and it's driving people into the arms of payday lenders and causing them untold hardship.
"We are saying that we want payback from these payday lenders so we want to force them to fund low-cost lending which can actually help families and communities rather than harm them, which is what so many payday lenders are doing.
"The Government has just been too slow to act and has been dragging its feet and not standing up to the payday lenders. That's why Labour would have a cap on the cost of credit."
Bank rates should continue to be scrutinised but payday lenders were "something of a different order" because of the "exorbitant" interest they charge.
"Someone's got to call time on it," Mr Miliband said during a visit to a credit union in Peckham, south London. "That's what a Labour government will do."
Payday lenders, which offer short-term loans to tide over customers who run out of money while waiting for their monthly pay cheque, have been widely criticised for charging vulnerable individuals sky-high interest rates which can top 5,000% a year.
Companies will have to pay an existing levy when they start being regulated by the Financial Conduct Authority (FCA) next year, but Labour is proposing an additional charge on top of this to boost the credit union market, where loans are available at much lower rates to households unable to access the mainstream credit market.
The party has already proposed a cap on the cost of credit, which was included in the Bill establishing the FCA, but has not yet been implemented.
Prime Minister David Cameron told the House of Commons yesterday that he had not ruled out a cap, saying: "We must bear in mind what has been established in other countries, and by our own research, about whether a cap would prove effective. It is absolutely right for us to regulate this area properly."