State-based rate caps that stop lenders charging exorbitant interest are likely to disappear once the Federal Government takes over regulation of consumer credit, raising concern about the impact on low-income borrowers who have no choice but to use high-cost "fringe" lenders.

The Federal Government is expected to rely on its "responsible lending" laws, due to take effect from November, rather than maintaining the interest-rate caps that apply in NSW, the ACT, Victoria and Queensland.

However, the co-author of a Griffith University study of interest-rate caps, Therese Wilson, says the Government shouldn't dismiss them out of hand. And, she says, regardless of which route it takes, it must ensure vulnerable, low-income borrowers have access to safe, affordable, short-term credit by closely monitoring and enforcing its rules.

"The Government has indicated that it's not keen on interest-rate capping," says Wilson, who also chairs the Australian Microfinance Network. "There will be a responsible-lending requirement attached to credit contracts and I think it's relying on that to minimise exploitative lending practices.

"What I would say is that the Federal Government needs to look a little more closely at interest-rate caps before dismissing them as an option.

"And whatever steps it takes, it must ensure that the regulatory regime is monitored and enforced."

Just as fringe lenders such as payday lenders have found ways around rate caps, they will look for ways around the responsible-lending rules, she says.

The states and territories that have interest-rate caps set a limit of 48 per cent. All but Victoria include fees and charges in the calculation of this annual percentage rate and Victoria sets a lower cap of 30 per cent for loans secured by a mortgage. Wilson says where caps don't apply, there have been instances of fringe lenders charging annual rates as high as 3000 per cent for small, short-term loans. What's more, the official interest rate cuts of recent months haven't brought fringe lenders' rates down.

Small lenders argued, in talking to the researchers, that they needed to charge at least 240 per cent for their business to be profitable and sustainable because of the risk of default and the small size of the loans they make.

Low-income earners, unable to access credit from mainstream lenders because of "rigid" lending criteria, have little option but to pay high rates if they need a short-term loan to cover a large energy bill or to replace a broken-down fridge, Wilson says.

The situation is no better or worse as mainstream lenders tighten their criteria in the wake of the credit crunch, she says.

That's because credit assessments are based purely on income rather than looking more broadly at ways to help them. "It has been demonstrated that people on low incomes can repay loans as long as the loan product is structured so as not to set them up for failure," Wilson says, adding that it requires reasonable interest rates, reasonable repayment schedules and some flexibility in the product. "It's about looking at capacity to pay in a real sense and structuring the product so it's affordable," she says.

To those who point to the sub-prime home loans debacle in the US the starting point for the credit crunch and, ultimately, the global financial crisis as evidence of the risks in lending to low-income earners, Wilson says it's necessary to distinguish between predatory and responsible lending.

"In the US, the loans that went bad were those predatory, exploitative loan products that set people up to fail for example, with ridiculous honeymoon interest rates that went through the roof after six months."

In contrast, the loan book of a community development bank such as Chicago-based ShoreBank is "rock solid", she says.

"It's not ShoreBank putting its hand out to the US government," she says.

In Australia, loan schemes such as those run by ShoreBank are a drop in the ocean compared with demand from those suffering "financial exclusion", Wilson says.

She points to a National Australia Bank project that is testing what the break-even rate for small loans really is.

Under the NAB Small Loans Pilot, launched in May last year with alternative credit provider Money Fast, NAB is providing up to $1 million in loan capital to fund small, one-year personal loans of $1000 to $5000, at an interest rate of 15.95 per cent.

Six months into the pilot, NAB's head of community finance and development, Richard Peters, says its data is pointing to a break-even rate the rate at which these small loans become profitable for the lender of about 28 per cent, well below the practice in the alternative finance sector and the states' rate caps.

"What this demonstrates is that fringe lenders who are charging annual interest rates as high as several hundred per cent are preying on consumers who have limited options," he says.