Payday lenders told to offer compensation - MSE News

Nasqueron

kwame41 wrote: »

The problem is when these loans cant be paid back and continue longer though.


They all use the loan shark argument to justify. I dont accept that all the people caught up in pay day lending would go to a loan shark if they didnt exist.


A small percentage yes.

As I said, a cap on total repayment is needed

Where do you think someone who has no money is going to turn if not to a loan shark or payday lender? It'll be a pawn shop, log book loan or even theft/illegal activity - people have to eat and pay bills, stopping payday lenders isn't going to change that

T-G-C

Nasqueron wrote: »

Abolishing default charges will mean people just borrow and don't pay back as there is no penalty for doing so. As bad as pay day lenders are, plenty of borrowers play the system.

APR are high because the loans are short term, an APR of 3650% seems high yes but that's because no-one borrows a pay day loan annually - over 365 days it's 10% a day. If you cap it at 300% then pay day lenders will not bother operating as it's not cost effective which just means people will end up back with loan sharks. The more obvious solution is a cap on maximum fees based on one loan of say 10% of the borrowed value or whatever.

You will never get away from lenders of short term loans be it pay day, log book or pawn shops because there are people who need it either because of poverty, poor money management or whatever

There is no evidence that default charges increase or reduce the volume of customers who either cannot or will not repay their loan. In almost all cases, the people receiving these charges are those in a vulnerable financial situation, such as too much debt, not enough income or a mixture of both. It is both immoral and unprofessional to put a suffering borrower into more suffering. This in itself shows that businesses like built with these practices have microscopic regard for customer welfare.

The borrower would not refuse to repay their loan if there was no default charge. It would only have a more positive impact on the borrower who has missed a payment or made it late and is not going to be further stalled with charges and the extra interest those charges attract.

This is because more powerful and deterring efforts such as bad markers with the credit reference agencies, defaulting and then proceeding to legal action would still be in place, which keeps borrowers in line. The charges are not an effective penalization and primarily penalize those who need support rather than those who are gaming the system. Those who are gaming the system will refuse to pay their balance, charges applied or not.

As for the APR cap, 300% is more than sufficient for loans taken out between 6 and 12 months. Loans which last only until the following payday are more scarce than a few years ago, with Wonga being one of them now gone. Even a subprime credit card at 59.9% APR would cost the borrower £40 a month on a £1000 balance, which I believe is more than profitable over 6 to 12 months, which is the most common now and the most expensive with the current outdated cap. If I borrowed someone £1000 over 6 months with a loan capped at 59.9% APR, I would still make £240 extra back, which is attracted for nothing other than lending it out. At 300%, it would be over triple the amount per month and triple the amount of profit, which is more than fair.

glennstar

I appreciate the post is a little stale, so apologies for that, but I wondered if it was worth someone stating the obvious...

One of the elements of the APR calculation is time, for those who are wondering, that's the Annual in "Annual Percentage Rate"... or

... APR means the interest rate for a whole year, rather than just a monthly fee/rate, as applied on a loan...

So... a £1000 loan over 1 month at 1294.1% RAPR (£240 interest) is just under twice the price of a £1000 loan over 12 months at 26.7% RAPR (£134.12 interest), but the latter is 2% of the former... which plainly is not representative - the irony of it!!

So I wonder if everyone could stop moaning about the APR and start talking about the interest rate...

In the EU, the focus of APR standardisation is heavily on transparency and consumer rights:

"a comprehensible set of information to be given to consumers in good time before the contract is concluded and also as part of the credit agreement [...] every creditor has to use this form when marketing a consumer credit in any Member State"

so marketing different figures is not allowed.

and no adjustment is made to actually inform the consumer!!