Payday loans surge as those in work watch bills stack up
Monday, May 25 2009
Another month is ending, the recession is biting and thousands of people are flocking to their local loan house or internet vendor for an average of about £230 to tide them over till payday.
Online lenders charge as much as about £25 for a £100 cash advance, payable by direct debit from the borrower's bank account 30 days later or on the day their salary hits. That adds up to a hefty annual percentage rate of 1,730 per cent. High street lenders that vet customers in person charge about half that.
Critics say that's still too much, risking pushing vulnerable people into a spiral of debt. Defenders say it is only intended to be a short-term measure, cheaper than running up an unauthorised bank overdraft, and can only be used by borrowers with evidence of a job and a bank account.
The Walworth Road, dangling off London's gritty Elephant and Castle roundabout, is fertile ground for H&T Pawnbrokers, the UK's largest lender in exchange for personal property, and The Money Shop, the leading cheque-cashing company with 250 stores nationwide.
The tired high street is home to a cacophony of discount stores, long-neglected branches of major chains and adventurously placed apostrophes ("Better than sale price's!").
Many shoppers wear a uniform of costume jewellery and shoulder-high tattoos or are pushing shopping trolleys. Sometimes all three. H&T's window is stacked with abandoned heavy 9ct gold chains and trinkets on sale for several hundred pounds.
Smarter than the nearby gemstore with handmade signs declaring "we buy gold in any condition, best prices paid", H&T feels more like a cross between a high street jeweller and a bank branch inside, with attentive staff manning tills behind glass screens.
The Money Shop is snappier still. Instead of jewellery, the windows feature a series of posters of glamorous models looking surprised, contented and flush with cash. "Get Away!", "So Cool!" and "Show Off!", the posters say.
An advert for payday loans features a quizzical fellow with a chisel jaw. "You sure?" it asks. "It's true! You get up to £500 in cash today!" It all feels very respectable.
Even so, the mostly young women leaving the stores with bundles of notes in their handbags on Friday morning were unwilling to discuss their visit.
The Money Shop says its 30-day loans for £14.99 per £100 cheque are a "cheaper alternative for those facing unauthorised overdraft fees or personal reserve costs on their current account". The growing payday loan market is little more than a decade old and still small in comparison with its US counterpart, according to the British Cheque Cashers Association, which estimates total loans are about £100m a year. They usually range between £50 and £800.
Geoff Holland, chief executive of the association, points to the strict regulatory and registration regime observed by the 850 companies he represents. Many offer payday loans, although they represent a small part of total revenue.
High street stores, which are able to check paperwork in person, turn down about 10 per cent of applicants, compared with the 90 per cent rejected online, Mr Holland said. Comparing APRs with those of bank loans is misleading, he says, likening extremely short-term rates to a situation where someone buys a £2.50 pint of beer for a friend in return for borrowing £25 over a week.
"People are more inclined to borrow money now because they need it than because they can," he said. "If someone's washing machine explodes and it costs £450 to replace it, they want to borrow only the money they need and to pay it off as soon as possible."
For the Consumer Credit Counselling Service, payday loans are the least worst solution for people who do not qualify for credit cards, in spite of the high interest rates.
"For some people it's the only sort of loans they have access to," says Tom Howard, an official at the debt charity. "It's better that they use those forms of credit rather than going to loan sharks who are illegal or perhaps more unscrupulous." The Office of Fair Trading says it has had few complaints and its major concern as it reviews lending guidelines would be about rollover lending from month to month.
Investors have also benefited from the search for alternatives to bank lending. Shares in H&T, one of the two listed UK pawnbrokers with Albemarle & Bond, have risen by about 10 per cent in the past year, while the FTSE All-Share Index fell by almost a third.
Revenue from payday loans and third-party cheque cashing showed "excellent growth" last year, rising about 6 per cent to £3.8m, the company said in March. It represented less than 10 per cent of the total. Nonetheless, the company said it was stepping up risk controls to prevent a rise in bad debts.
Source:: Ft.com