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?
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Replies to This Discussion
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Permalink Reply by james walsh on
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If you borrow £100
you owe them £2,356
Is this legal ?
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Permalink Reply by Clive Carter on
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The sum is borrowed for only a pay day or two, at least in theory. APR is an annualised rate, which is the only sensible basis for comparison.
I also wondered about the legality of lending at rates like these, when we consider that credit card and store card borrowing is thought high when its between 20% to 30%.
And yet, the company's website makes no secret of the APR nor the absolute amounts to be repaid (see the link). People must read it without understanding what a phenomenally high interest rate it is. Alternatively, you'd have to be desperate indeed to enter into such a contract, knowing that all you're doing is deferring a bad situation for a week or two, and creating an even worse situation.
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Permalink Reply by John on
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It's basically pawn shop rates - you'd only owe the 2000-odd quid if you didn't pay it back on pay day, and kept the cash for the full year. It is a horrible, exploitative and deeply damaging form of credit, especially because it seems reasonable until you work out the APR.
Because you don't borrow over the course of the year (normally for a maximum of four weeks) and you don't necessarily borrow that much (not more than your next pay cheque at least), it seems as though it hasn't cost you that much money. However, it is actually a dreadful rate, and worse than that, the lending is generally totally secure (if you borrow money, you give them a cheque for the amount, post-dated for pay day) - so the pawn shop lender is almost certain to get the money back, yet they are still charging you a massive amount compared to what you have borrowed, even though there is negligible risk to them. This is one of the major reasons that people in poverty end up staying there, because they can't get by one month, can't get money from a bank because they're seen as a credit risk, so they borrow from a pawn shop lender at rates like this, and then (because they've paid so much of their pay cheque to borrow the money in the first place), get even less far into the month on their own money the following month: that goes on until whole families are living completely in perpetual and growing debt, despite the fact that they may actually have a steady income from the adults.
Oxfam recently launched a campaign which had this as one of its focuses: Meet Fred
And a good friend of mine blogged on the campaign (here), and it was him who pointed out to me how crushingly exploitative this kind of lending is.
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Thanks for the link John
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Permalink Reply by Michael Anderson on
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Companies liek this make a living because they know the people who enter into the contract with them
a. have no other alternative
b. are the least likely to be able to afford it.
In other words - open exploitation
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Permalink Reply by Simon on
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OK, this is not a popular viewpoint, but I'll make an attempt to defend companies like QuickQuid. I know a bit about about the industry having done some work with them recently (in a regulatory capacity, I should add).
First, APR is helpful when evaluating long loans such as mortgages, but completely meaningless for short term loans such as this. However even though that fact is widely recognised, the Consumer Credit Act obliges finance companies to state their APR on all adverts.
An example will illustrate why: On a late Saturday night in the Salisbury you borrow £50 from a mate because the cashpoint outside Tesco isn't working. When you see him a week later in the same pub, you pay him back and buy a pint of Guinness to thank him (£3.50). Seems reasonable? Well the APR on that "loan" was 3,272.5%
Other indicators of value such as total cost of credit are more helpful than APR and are also used by the industry, but are less familiar to the general public, and don't make such great headlines in the press when "doorstep lender" stories get into the news.
It's still an expensive way to borrow money, and over anything but the short term could lead to a spiral of debt. So why do people use services such as this? The main reason is that not everybody is fortunate enough to have an emergency fund to cater for unexpected cashflow problems. If those are your circumstances, an unexpected car repair or need for a new washing machine might be something for which cash isn't immediately available, but which can't wait until the next payday. Payday loans such as this one are a possible solution.
A better option might be borrowing from friends/family, but not everybody is able to, or wants to do that, and as the above example illustrates, this could easily be more expensive in practice. Other options such as unauthorised overdrafts from high street banks can be far more expensive when the charges levied are added up.
Companies dealing in this market, perhaps surprisingly, do not generally make excessive profits. This is in part due to the high cost of collection relative to average loan size, and bad debt which is unrecoverable due to the unsecured nature of the loans.
A report was published recently by the Joseph Rowntree Foundation examining whether a not-for-profit home credit business would be feasible - http://www.jrf.org.uk/publications/not-for-profit-home-credit (home credit is a similar business model to payday loans, and the same companies are often active in both markets). One conclusion of that study was that even if the initiative were backed by significant levels of public funding, APRs on one year loans would still be well over 100% due to the high costs of customer recruitment and collection.
Like I said, I don't expect this to be a popular view, but this is really a complex area of consumer finance that warrants a closer look before jumping to conclusions about "exploitation".
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thanks simon - put in simple terms:
If i borrow £100 how much do i owe at the above rates after owing that £100 for 1 year ?
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Can you tell us how much it is ?
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Assuming you make no repayments of capital, then you would owe £2,356 - compound interest is a dangerous thing! I don't imagine any lenders would offer anybody an interest-only loan on these terms for a year though; the chance of getting any repayment would seem to be slim if thr creditor can't make any repayments in the meantime. Payday loans such as these are typically for terms of a week or two.
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Thankyou simon
£2,356 is a brutal charge to pay back and remember the people borrowing are already in money trouble.
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Simon, I accept that the net profits of this industry aren't going to be quite as high as might at first appear and they will have high overheads and lots of bad debts.
You don't come across wholly as an apologist for this business. But if you're working in a regulatory capacity in this 'industry' it appears, like some other regulators in this country, you have gone native and are identifiying too much with this "complex area of consumer finance" that you're supposed to be regulating. But I suppose this is to be expected as we have a government of remarkably laissez-faire economics.
APR is not meaningless for short term loans, in fact it is full of meaning. Indeed when it comes to working out the price of borrowing money it is the only sensible, meaningful yardstick for such calculation. It's not just for annuities or other long term instruments. It is quoted for short term deposits at banks (90 day) and is equally valid for working out the cost of borrowing over a matter of weeks.
The example you gave of an interest rate comprising a pint of Guiness, was discretionary, but I doubt if these pay-day lenders have quite the same relaxed attitude to interest charges that one would have signed up to.
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. When agreeing to usurious rates like this, the chances are that borrowers are only going to make their bad situation even worse.
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.
When you say this is an expensive way to borrow money, what you mean it is a phenomenally expensive way to borrow money, eclipsing all other cost of debt and I much doubt it is something you would ever countenance for yourself.
You mention several things that are helpful and not helpful. In the long run, it is not desirable that an industry like this has ready and willing customers. If anyone is prepared to borrow at these rates, they are probably both desperate and financially illiterate.
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.
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