Those payday loans really are such terribly bad deals, aren’t they?
PAYDAY loans are rip-off. Well, so we’re told, endlessly and at length. Companies charging 4,000 percent APRs to lock the poor into a cycle of debt: why, the bastards.
Which brings me to a number of points.
1) APR: it’s a howlingly stupid method of measuring an interest rate over the short term. By definition a payday loan is only taken out for a short period of time. why you’d try to measure that short term loan as if it was being taken out for a year is beyond me.
2) The actual interest rate isn’t 4,000 percent of course. That’s just a technical detail of how the law says that you’ve got to measure the APR. You’ve got to add the fee charged plus the interest together in order to measure the APR. And there are some costs involved with making a loan. Someone walks in off the street and asks for a £50 loan (imagine). You’ve got to do something to work out whether they’re good for it. Check their name, maybe their credit record, something. This takes time and costs money. Say, imagine, it costs £10. That’s 20% of the loan amount and you’ve got to actually charge them that amount otherwise you’re losing money lending to them. The APR calculation then says, well, that charge is for a week, so multiply the charge by 52 weeks to give the APR (before we even get to the interest rate itself). We’re now basing out APR on the idea that it costs £520 to borrow £50: that’s a 900 % APR just there. If it still costs us £10 to check but we lend them £100 that APR falls to 450%: it’s just not a sensible way of dealing with the fixed costs of lending.
3) There’s much muttering about how this all obviously leads to vast profits for the lenders. Which is odd really. I went through the accounts of Friends Provident once, one of the doorstep lenders. They seemed to be making about a 20% return on capital: useful and interesting but not exactly anything for a company to write home about. The vast fees and interest seem to be swallowed up by the vast costs of this type of lending: including he sky high unrecoverable loan rates.
4) Of course, if you really did think that the prices for these loans were too high then you’d start up your own operation. Hey, with 4,000% weekly profits you could start with £100 and within a decade be richer than Bill Gates or something. That people don’t tells us something about how the profit rates aren’t quite those headline numbers really.
And finally, and most importantly, those loan rates might look high to you. But they obviously and clearly don’t to the people who take them out. I’d happily pay £10 on £50 if it was the difference between feeding the kids tonight and not. As, no doubt, would you. This doesn’t mean it’s not worth exploring other avenues: credit unions for example. But that people value money now so highly, so much more highly than you or the bleating classes do, doesn’t mean that we should demonise those who supply them with money right now. The recipients of the loans obviously value them: so why shouldn’t people provide them with what they value?
Posted: 28th, November 2012 | In: Money Comments (4) | TrackBack | Permalink
