Harringay, Haringey - So Good they Spelt it Twice!
Borrow cash until next payday: APR = 2,356 per cent
QuickQuid is advertising on television.
At the bottom of the rates and terms page is the "typical" APR:
2,356 % per annum
Who would be attracted at that kind of interest rate?
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At the bottom of the rates and terms page is the "typical" APR:
2,356 % per annum
Who would be attracted at that kind of interest rate?
.
Replies to This Discussion
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Permalink Reply by Simon on
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Clive,
Thanks for the response. I thought my post might stimulate some debate!
APR is not meaningless for short term loans, in fact it is full of meaning.
You are of course quite right that APR is not meaningless; what I should have said is that it is unhelpful in these circumstances.
I'll give another example: You need to borrow £100 until the end of the month. You are in the unfortunate position of having no bank account or credit history so are unable to access the vast majority of consumer loans; you are unable or unwilling to borrow from friends or family, and have nothing of sufficient collateral to offer to a pawnbroker. As the only option immediately available to you, three loans of £100 are offered to you by a cash lender, on the following terms:
1) Pay back £125 in one installment in one month (APR=1,355%)
2) Pay back £21 each week for 6 weeks (APR=3,324%)
3) Pay back £30 each week for 4 weeks (APR=4,665%)
How do you decide which one of these loans is the best value for you? Judging from the APRs, it's an easy question - Loan 1 is by far the cheapest, and as most financial journalists would put it, Loan 3 is "almost three times as expensive".
Now look a bit closer. The TCC (total cost of credit) for these loans are:
1) £25 (125*1-100)
2) £26 (21*6-100)
3) £20 (30*4-100)
Looked at from this perspective, there isn't actually a great deal between them, and the choice probably comes down to cashflow considerations. If you can spare £30 from your weekly pay packet, then Loan 3 is almost certainly the one to go for - you'll pay down the debt as fast as possible, and incur the lowest overall financing cost. However if you won't be able to repay any of the capital until a month's time, then only Loans 1 and 2 are likely to be suitable, and the choice probably comes down to which day of the month you get paid.
Indeed when it comes to working out the price of borrowing money it is the only sensible, meaningful yardstick for such calculation.
In the example above, I think the APR - while "meaningful" in a rather abstract way - is totally unhelpful as a yardstick compared to the TCC. By contrast, the concept of TCC is easy to grasp, and most people on marginal incomes are painfully aware of the importance of cashflow as an important factor.
For long term loans, APR is a helpful indicator. For short term loans, is just isn't.
Borrowing money at Annual Percentage Rates (APR) of anything remotely like 2,000 % is an act of the utmost financial folly, as I'm sure you must realize.
It's certainly extremely unfortunate that anybody would find themselves in a position to have to take out loans such as these, but it's not necessarily "folly" in all cases. As I've said before, if your only alternative is an unauthorised overdraft from a bank, that may well prove to be a much more expensive option. And in any case, a large proportion of customers for these sort of loans don't have bank accounts to start with.
It's clear that anyone borrowing at these rates does not have a clue what interest rates mean, because the rates are emblazoned on these companies' websites and apparently it doesn't deter custom. Some punters may be so ignorant that they may think that the higher the interest rate the better.
I suspect you're absolutely right on all those counts. And current consumer regulation does little to help these "punters" by insisting on APR being used as the yardstick of value, because it just isn't helpful for these types of loans.
You mention several things that are helpful and not helpful.
Sorry if you found any of my post unhelpful. Could I ask which bits you were referring to?
In the long run, it is not desirable that an industry like this has ready and willing customers.
Possibly, but there is no easy answer to that problem... Do you think it would it be better if these loans were outlawed altogether? And if so, where might we draw the line between "good" and "bad" loans?
If anyone is prepared to borrow at these rates, they are probably both desperate and financially illiterate.
The home credit industry has over 3m customers in the UK, many of whom are no doubt desparate and financially illiterate. I'm not sure how big the market for payday loans is, but I imagine it is similar.
More needs to be done to teach financial basics, as part of a general consumer education, at school, in order to reduce such exploitation of the vulnerable.
I totally agree. The understanding of financial basics in this country is woeful. Schools, the press and financial institutions appear to bey unwilling or unable to change that (or possibly they aer complicity in maintaining the status quo).
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Permalink Reply by Clive Carter on
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Simon thanks for your considered response; I found all of your post interesting although we are going to have to continue to disagree about the relevance of APR, AKA the interest rate, AKA the cost of borrowing.
One of the biggest forms of lending is also one of the shortest terms, and that is the overnight lending between trading banks (and which nearly froze 11 months ago). This is likely priced in basis points over LIBOR . i.e which is of course an interest rate (100 basis points is one per cent: interest). Thus, overnight rates involving millions of pounds will be based on an annual interest rate.
I observe that some regulators in the UK have got too close, and altogether too cosy, with the industries they're charged with regulating. Banking is one such.
When I cheekily suggested that as a regulator, you had 'gone native', what I was getting at, was that you prefer to use the language of the industry. And there is little doubt that that is to eschew talk of interest rates altogether and to prefer total cost of credit, which sounds a lot cheaper. Being obliged to quote APRs only draws attention to the usury. Are there no laws about usury any more?
If we did away with mentioning APR and interest rates in this context, it would play into the hands of the 'industry', disguise the true cost of borrowing and remove about the only piece of information that has any chance of helping future punters make an informed decision.
Using the pay day loan industry's preferred terms and language, in my opinion, helps to perpetuate this regrettable industry and by extension, helps to keep its customers financially ignorant.
I think we both agree about the need for better education in financial matters ...
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Permalink Reply by John McMullan on
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Oh lay off Clive, those bankers are a far better bet than someone on a council estate with nobody else left to borrow from, that's why they get to pay libor...
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Permalink Reply by james walsh on
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I agree with John McMullan
This is compound interest from the start.
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I was sort of being cheeky... libor is for very healthy banks, if someone sniffs something bad they're not obliged to loan you anything and you have to ask the BoE. Libor loans might be "unsecured" but it's all about reputation and trust. We're also talking millions of pounds here so there's no need to charge a 200 pound "admin fee" even on 0.07% to cover your fixed costs. It's a good business as you're pretty much guaranteed your money back and it's a nice little earner overnight; that's where your wages probably go for the three days that they have left your employer's account before they enter yours.
To me Simon has justified the APR on the loans in that they're high risk and do incur some fixed administration costs. Let's say I loan 500 people 100 pounds each for 30 days. I expect 100 to pay back on time, 200 to have trouble and possibly need refinancing and another 200 I have to chase hard and maybe not see anything out of 100 of those. I just lost 1/5th of my capital and had to be a complete thug with 2/5ths of my customers, which is a waste of my time. I think I'd have to get 10000 pounds off of 4/5ths of my customers to merely cover my bad debts. That's 25 pounds each person - JUST SO I COULD GET MY CAPITAL BACK.
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MY POINT was nothing to do with creditworthiness, it was about the universal utility of interest rates, which is what Simon is challenging.
We all appreciate that those who are so desparate and financially ignorant as to use pay day lenders, are amongst the least creditworthy borrowers. A fool and their money are soon parted and we should not seek to perpetuate people in their foolishness.
Actually, interest rates above 100% are more difficult to understand than those under 100%, but all the more reason they should be publicsed as alarm bells should be ringing all the more loudly.
As an aside, I wonder how many of these emergency loans at phenomenally high rates of interest are to deal with gambling debts, in the belief that the borrower will win back more than enough money to pay interest of 2,000 per cent plus.
(although unhealthy banks continue to enjoy borrowing and lending at a mere few basis points above LIBOR, in a sense the investment banking arms of those banks may have a similar expectation: they're been called the casino banks).
The economy is in a mess partly due to lax regulation of banks and financial services and excessive cosiness between the Govt and the City.
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As an aside, I wonder how many of these emergency loans at phenomenally high rates of interest are to deal with gambling debts, in the belief that the borrower will win back more than enough money to pay interest of 2,000 per cent plus.
I suspect very few, as the whole business model is reliant on managing/minimising bad debt. Lenders have a strong interest in their customers' ability to repay, and as a result they turn down a high proportion of loan applicants. Whatever your views on the ethics of the business, it is run and operated by people who have a solid grasp of risk management. The simple reason is that they are generally putting their own money at risk: lenders are often one-man-bands or small companies lending their own money; larger businesses in the market manage their risk by employing agents whose remuneration is heavily geared towards loan performance rather than total assets, i.e. you only get paid when you collect, not when you lend. Given the events of the last 2 years, the management of RBS, Lloyds TSB, Barclays and other financial illiterates would appear to have something to learn from this...
Common purposes for these sorts of loans are:
- Christmas/birthday gifts
- Household items
- Holidays
- Household bills
- Clothes (particularly at the start of the school year).
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YESTERDAY, the NZ Business Review reported that a Member's bill is to be brought before Parliament, by a Labour MP, which would cap the interest rate that lenders can charge under a consumer credit contract at 48 per cent.
The MP claimed that "Payday loans from loan sharks at 2000 per cent a year are a disgrace and New Zealand is one of the few countries left that does not have laws in place to deal with them"
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