'What’s fair interest on a payday loan?' poll discussion

Former_MSE_Lawrence

Poll Started 14 December 2010:

What’s fair interest on a payday loan?

A recent campaign in parliament has demanded a look at regulating payday loans which can charge huge interest rates on loans, so we want to know what you would consider to be a fair amount both in cost and in interest.

PLEASE PICK ONE ANSWER FROM EACH QUESTION.

Q1: What should be the MAXIMUM allowed APR on £100 borrowed for a month?

10%
25%
50%
100%
200%
500%
1,000%
2,000%
5,000%
10,000%
Over 10,000%

Q2: What should be the MAXIMUM COST on £100 borrowed for a month?

£1
£2
£4
£6
£10
£15
£20
£30
£40
£50
Over £50

Please vote here, or click post reply to discuss below. Thanks

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pjsmiffy

Very interesting that people don't see monthly cost as Annual interest
£10 interest a month is 285%

Rafter

Very interesting - totall agree pjsmiffy people just don't get that for small amounts over small periods APR is a stupid way of measuring it.

People are voting for a loan company to receive between 80p and £1.90 for a loan of £10 which given wages for bank staff of say £10 an hour gives about 5-12 minutes to arrange each loan even before computer systems, losses etc are taken into account.

It would seem to me we need some common sense rules here and that APR should not be used for loans of less than 1 year duration or below £500.

For loans up to £250 I would suggest a maximum arrangement fee of £10 and a maximum interest rate of 5% per month (80% annualised).

That is likely to make them better value than the charges made by banks for unauthorised overdrafts as well as covering costs for the loan provider.

I really think that as part of their social license for having control of the payments system that banks should offer a £100 buffer on all basic current accounts with an interest rate of no more than 1% per month. Any bad loans would be recovered through a £2.5 a week deduction from benefits - so very little credit risk for the banks.

Any time someone dips into the buffer (or an unauthorised overdraft) they should receive a message from their bank providing information around debt advice charities and budgeting resources so people really realise that paying huge sums of interest or charges to their bank is unsustainable and might do something earlier to recover their financial health.

That coupled with sound education might just break the cycle of debt misery for many in the future.

R.

rpb

I thought the same thing. I was going to say £5 cost (teller's time, paperwork, etc.) for £100 loan, but £6 was the only close option. £6 a month works out to around 100% APR, so I picked that.

Personally, I think 100% APR is outrageous for a loan in general, but a loan for one-month is in a different category, as earlier comments have stated.

I can't help thinking that for such extremely short-term loans they should just be stated as a setup cost (limited to, say, £5) plus a percentage rate based on risk and other economy-based measures (limited to, say, 20% annual or base-rate + 20%, etc.) and each should be limited separately to avoid abuse. And in which case I would probably pick those two limits I just mentioned - max admin fee £5 and max rate (currently) 20%-ish per annum (compounded).

If both are highlighted then it stops lenders hiding fees in either setup cost or interest rate. Plus, the 'reasonably' low annual rate means people unable to pay off on time won't see their debt grow at an unreasonable rate.

edinburgher

Granted, seeing loans with APRs in four figure etc. is horrendous, but isn't there some evidence to suggest that those who resort to lenders of last resort are less likely to repay their loans?

I thought that the link between risk and return was fairly fundamental to any agreement to loan money.

So all the people saying 10% APR are either having a laugh, or just don't appreciate this fact. I lend on a social lending site and 10% is a pretty good rate for anyone who doesn't fit into the top few tiers of creditworthiness - it surely can't be good business sense to give these sorts of rates to people who can't prove an ability to repay?

RichPyke

The way I see it, and you are all free to disregard this if you do not agree, but if you need to borrow money for something then you should be willing to borrow on the lenders terms regardless.

Chances are, if you can't afford something then you don't need it. Too many people live beyond their means and spend out more than they earn. Luxury items like the latest 3D LCD TV, games consoles, furniture, toys, nights out etc. are usually the main cause.

Personally I try to live at 3/4 of my means. In other words, if I earn £100 per day I expect to spend no more than £75 per day. I have managed to live like this for a while however now I am a new home owner it is more of a struggle, but still do-able! I just have to cut back on nights out, new toys and other luxury items.

I don't think there should be any capping of any loans. If you need to borrow £100 then chances are you have no money, the risk is much higher that the borrower will not pay it back. If you borrow £100 for 10 days then the lender needs to make a profit to cover their costs and admin time etc. so if it was just 10% APR then the interest would be so little it wouldn't be worth it for the lender to lend the money. It needs to be an insanely high APR for it to be worth lending for such a short time. OR add admin fees to it, say £25 per transaction, which would probably cost the borrower more than high interest rates.

chardir

It seems that the results of this poll suggest that most people:

a) Don't understand what 'APR' means.

b) Don't understand what 'maximum' means.

charlie792

I think its shocking seeing some of these APRs advertised - Quick Quid 2222% or Wonga.com 2689% - I used the sites calculator borrowing £400 over 30 days would cost £125.48 - surely its got to be cheaper to arrange an overdraft?

bacillus

I have to agree that most people do not seem to match their answers to the two parts to the question which suggests they don't understand the numbers.

personally I always tried to follow

"neither a lender nor a borrower be"

mortgages and business loans are perhaps somewhat different but then they do not tend to charge astronomic APRs.

Overall I can't help feeling that if we had price control for loans (for that is what some are proposing here) then why not for other discretionary things ? A state-approved price for books ? or for clothing ? or cars ?

carlw

Personally i don’t think there should be a maximum, therefore i haven’t voted. I think the industry SHOULD sort itself with the less competitive firms going out of business as people are attracted to the more competitive firms. Surely banks could step in and offer higher rate overdrafts to compete against the PayDay loan companies and profit from it in the process. What should be a requirement is a very clear understanding of what will be charged before the loan is taken, and the penalties if the payments are not made when they should be. APR is not the clearest method of showing this in my opinion, and it also doesn’t help to have the penalties outlined in hard to read terms and conditions. Outline the main points clearly before the loan is requested.

John_Pierpoint

teddyco wrote: »

High interest loans pale into insignificance in relation to the amount of taxes that people are forced to pay every month to
support wasteful government spending.

The Obama administration, with major support from the U.S. Congress, is set to approve a massive tax cut bill
that will stimulate growth and help the poorest Americans through these troubled economic times.

We should stop focusing on attacking banks and financial products and start attacking the government to pressure
more tax cuts to help small businesses get started, help the poorest families and promote job growth in impoverished areas of the country.

High taxation is 'legal theft' and it has not only destroyed the middle classes, but it's hacking at the thread that the UK
is currently dangling.

Somehow our American cousins are STILL getting away with living at the expense of the rest of the world; their bloated lifestyle is subsidised by Chinese peasants. [The 8 million of them per year leaving the countryside and trying to to get a job in a factory].

We in the UK no longer have that option - we lived at the expense of the rest of the world in Edwardian times but world wars killed that.
It took North Sea oil, Margaret Thatcher's once in 10 million year's windfall to pay off our World War borrowings.

Printing even more money is the road back to the 1970's (Sugar shortage, bog roll shortage, candle shortage and 18% inflation).
We don't the the USA magic money tree and the oil is running out.

I think USA may be drinking in the last chance saloon - If you have children/grandchildren, learning Mandarin might be a sensible investment.

In the 1960's the government managed to run the country using only about 25% of our gross national product, now it needs 50% - welcomne to a country that is twice as well run as it was in the swinging 60's.