'The bank deal that makes 5,000% APR payday loans look cheap' blog discussion

Rafter

zagfles wrote: »

Do you mean 40%pa or 40% total however long the loan lasts (up to 12 months)? I don't think either would work for typical payday loans, which only last a week or 2.

If they are only able to charge 40%pa, ie about 1.5% for 2 weeks (plus the £5 for admin), there's no way that would be enough as they need to make serious provision for bad debt for this type of loan, as they are taking a gamble they won't get the money back.

If they can charge 40% for 2 weeks but can never charge the same customer again within 12 months then customers could simply roll their loan over to a different company every month, solving nothing.

Can see your point. My suggestion was that a payday company could charge more than the 40% in the first month, but if the loan rolled over or because the customer was in difficulty then the total cost of credit would never be more than £100 for a £100 loan in any 12 month period.

If the payday loan companies are accepting multiple loans from different companies then they are obviously going to suffer big bad debts when the 'end game' is reached.

Part of the point was to make this lending far less profitable so these companies didnt have such attractive business models and aren't able to throw millions at marketing a product which for many customers is encouraging them into unsustainable debts and financial hardship.

I would rather the banks were forced as part of their 'social contract' and privileged position to offer short term emergency loans of up to £250 with a capped cost than allow such huge amounts of interest and charges to be sucked out of consumers pockets with little social purpose or value.

R.

zagfles

Rafter wrote: »

Can see your point. My suggestion was that a payday company could charge more than the 40% in the first month, but if the loan rolled over or because the customer was in difficulty then the total cost of credit would never be more than £100 for a £100 loan in any 12 month period.

If the payday loan companies are accepting multiple loans from different companies then they are obviously going to suffer big bad debts when the 'end game' is reached.

Part of the point was to make this lending far less profitable so these companies didnt have such attractive business models and aren't able to throw millions at marketing a product which for many customers is encouraging them into unsustainable debts and financial hardship.

I don't think it's that profitable - as per Martin's article and above, sky high APRs doesn't mean the cost of credit is high. Provision for bad debt is a significant factor - if 1 in 20 debts go bad on a typical 1 week loan, they'd need to charge 5% just to break even, ignoring all the admin costs, legal fees etc. That's an APR of over 1000%.

I would rather the banks were forced as part of their 'social contract' and privileged position to offer short term emergency loans of up to £250 with a capped cost than allow such huge amounts of interest and charges to be sucked out of consumers pockets with little social purpose or value.

R.

Banks have enough bad debts as it is. The Americans tried something similar with the "communities reinvestment act" which basically forced banks to lend to poorer people, ie make "subprime" loans. And we all know what that led to...

Better would be to finanically educate kids (as Martin has campaigned for). People getting payday loans aren't necessarily poor, or desparate, they are more likely to be people who don't understand finance or are very bad at managing money. I know people on minimum state benefits who have never had or needed a loan their life, and a couple who earn over £70k between them and are always borrowing at silly rates.

But until then, payday loan companies charging 1000%+ APR do provide a useful social function if the alternative is a loan shark who'll kneecap you if you don't pay...

JimmyTheWig

zagfles wrote: »

I know people on minimum state benefits who have never had or needed a loan their life, and a couple who earn over £70k between them and are always borrowing at silly rates.

While I agree in the main, it is worth noting that for the "well off" couple it would be much easier to repay the loan and any rollover charges if something went wrong with repaying on time (e.g. pay cheque was late for some reason) than it would be for the couple on minimum state benefits if they did borrow and then couldn't repay on time.