I recently mentioned my occasional involvement in the campaign to impose an interest rate cap on those lenders who charge exorbitant fees in the secondary loans' market in the UK, and elsewhere. These loans are unsecured to those often without a credit record who borrow relatively small sums in cash. The leading supplier is Provident Financial. Their average APR is 177%.
That's nothing though compared to an example I've been sent in the following mail (which is genuine bar the name being deleted):
Dear X,
Thank you for your request.
Your loan limit will be determined by your net pay. Loans can be outstanding for
a maximum of 31 days and repayment dates are determined by your pay frequency.
All loans are due to be repaid in full on the next date your salary credits
your bank account as our client does not offer extensions or rollovers.Poundstillpayday.co.uk charges only £29 per £100.00 borrowed!
If you have any questions, please contact us via:
Freefone: 08000 32 76 55
Fax: 08000 66 45 27
Email: customercare@poundstillpayday.co.uk
On-line Chat: http://www.mypoundstillpayday.co.uk/chat.htmlWe are available from 7am to 11pm on Monday to Friday, from 9am to 5pm on
Saturdays and from 12pm to 6pm on Sunday. One of our friendly customer service
staff will be happy to assist you.Thank you for choosing PoundsTillPayday.co.uk
That's £29 for a £100 loan for a maximum of 31 days. I checked their web site. It says under APR calculation:
Our Fee:
£29 per £100, for example, if you borrowed £300 your repayment amount would be £387 due in full on your next payday.
The APR over 31 days would be 341%
Remember, that's the best case. If you borrow over a shorter period the cost skyrockets. This is straightforward exploitation.
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“This is straightforward exploitation.”
I’m confused. What, exactly, do you believe the effect of capping the rate that lenders can charge would be? In what way would this be a net positive for those who believe they need to borrow and who have no better alternative? If you believe a better alternative would emerge as a result of the law you propose, what is your explanation for why it has not emerged already?
There are better alternatives. Regulation would force an industry using 100 year old methods that are sustainable only because 1) the big banks won’t enter the market due to snobbery and 2) the consumers have no choice, to update the way it works introducing cost effective payment methods for example.
Why hasn’t it happened? Because big profits have been used to bludgeon weak ministers. That’s why.
“the big banks won’t enter the market due to snobbery”
Really? You’re implying that there are easy windfall profits to be had and yet the banks are leaving the money on the table…. declining to compete for this lucrative sack of cash? Something doesn’t sound right…
“the consumers have no choice”
Which is another way of saying that, even though there is a bonanza to be had, other potential entrants to the market have chosen not to. Again, something just doesn’t sound right.
I wonder what the cost of running such a loan operation would be…. that network of local sales agents and cash collectors, combined with a high default rate and the fear of negative publicity must surely impose a high cost?
“Because big profits have been used to bludgeon weak ministers. That’s why. ”
Examples? Who? When? Where? To what end?
Dear Richard
Can I suggest three things:
1) Look at the reaction to HSBC buyomg into this market and you’ll undertsand what I’m saying
2) Open you eyes to all the failings in real markets. They don’t work like they say in the text books
3) Look at the profits Provident Financial makes
This information is all available. I talk about the reality, not the dogma of these things
Richard
“I’m confused. What, exactly, do you believe the effect of capping the rate that lenders can charge would be?”
Maybe, I’m missing something, but it seems to me that the effect would be that people (who presumably are already in financial difficulties, or they wouldn’t have to use these companies), wouldn’t find themselves hit with a 341% interest charge.
In the best case scenario, people wouldn’t need to go into debt, or at least could all have access to high street banks lending services, but whilst people continue to need the services of such companies, the government has a role to play in ensuring that desperate people aren’t exploited and exposed to greater levels of risk (both financial and personal).
Limiting the interest charged would make it slightly cheaper for the borrowers – surely that’s a net positive for them?
“Limiting the interest charged would make it slightly cheaper for the borrowers”
That is an unsubstantiated assertion.
Given that no lender to date has chosen to offer a “slightly cheaper” rate of interest to the target customers of such loans, what makes you believe outlawing the activities of those who charge more would suddenly persuade a lower-cost lender to step forward? What aspect of the proposed law would make a previously unattractive prospect turn into an attractive one?
High priced loans may, indeed, be distasteful. But if the alternative to such provision is *no* provision, can you truly say you are acting honourably if you seek to outlaw them?
“surely that’s a net positive for them?”
If a lower-cost loan was available to them then, yes, it would. It does not follow that outlawing the more expensive option would result in a lower-cose option becoming available.
“Look at the reaction to HSBC buyomg into this market and you’ll undertsand what I’m saying”
If I’m not mistaken, HSBC has just announced that it is raising its provision for bad debts in its US sub-prime business. This would suggest, one would assume, that such businesses are riskier and potentially less lucrative than the tone of this blog would suggest.
“Open you eyes to all the failings in real markets. They don’t work like they say in the text books”
I don’t think I’ve ever claimed they do. However, I tend to believe that one should measure public policy on its outcome rather than its intent- however honourable that intent may be.
If the effect of a policy would be to harm the very people it intends to help, then it’s a bad policy.
I have allowed the comments from Richard Brown, above to be posted
I do not agree with them
Worse than that, this is the sort of argument used by this industry to justfy this exploitation
Imposing an intreest rate cap could not harm those currently exploited. It would encourage the industry to be efficient, to offer alternative delivery mechanisms and it would encourage market entrance from those who do not at present think this a market they wish to be associated with for reputational reasons.
Richard has had opportunity to deal with these issues. He has not. I am not extending his chance to be an apologist for the unacceptable on this site.
“Worse than that, this is the sort of argument used by this industry to justfy this exploitation”
I get uncomfortable whenever I see the word “exploitation” used in these sorts of situations. Under the status quo, those who are excluded from mainstream financial services provision and require loans do, as you suggest, have a rather unpleasant choice: take the very high cost loan from one of these providers or take no loan at all. One may wish the providers to offer better rates but nobody has stepped up to the mark and done this. The logical step you’re making – that I don’t understand is – how does the removal of the high cost supplier from the market result in a lower cost provider springing up? In other words, this only makes sense if one claims the higher-cost provider somehow suppressed the lower-cost one. But that flies in the face of evidence in every other market in the world. Perhaps removing such provision all together would be a good thing – but that’s a different argument. That’s a paternalist argument that says poor people or people with bad credit can’t be trusted to make their own decisions. It’s a perfectly valid position to hold (if somewhat distasteful) but, unless I’m misreading you, it isn’t the position you’re taking.
“Imposing an intreest rate cap could not harm those currently exploited. It would encourage the industry to be efficient, to offer alternative delivery mechanisms and it would encourage market entrance from those who do not at present think this a market they wish to be associated with for reputational reasons.”
Again, I don’t see how exclusion of a provider from a market would incent others to become more efficient. Elimination of competition usually has the opposite effect.
I apologise for not commenting on your “reputational” point. You are correct that the darker areas of some markets are probably no-go areas for mainstream suppliers and that the elimination of some of the shadier providers may encourage them to move in. But even that’s quite a hard argument to sustain: “eliminate non-mainstream lenders so that the big banks can profit from lending to the poor instead!” 🙂
Sorry – forgot to address your point about allowing my comments.
I do hope you see fit to publish these comments (and respond to them).
You clearly find the position I’m taking unpalatable but I do hope you accept that I am being neither disingenuous or callous.
“High priced loans may, indeed, be distasteful. But if the alternative to such provision is *no* provision, can you truly say you are acting honourably if you seek to outlaw them?”
I think that assumes that if interest rates were capped, the companies involved would give up and go home. More likely, they’d accept that lower profits are better (for them) than no profits and stay on offering loans at the highest rate allowed (and no doubt try and offset the loss through an increase in “administration fees” and other such devices – but that would be something for the framers of any such legislation to worry about).
It’s an unashamedly paternalistic argument, but society, through it’s democratically elected representatives, has accepted the need to act to stop people working stupidly long hours, for minimal wages in unsafe conditions (through working time, minimum wage and health and safety regulations). If the welfare of people (who already have fincnaial problems) is affected by companies charging such high interest rates, it seems perfectly reasonable for the government to act to stop such interest rates being charged.