Sunday, October 20, 2013

Frank Newman: Payday loans

Central government is currently reviewing consumer credit law.  That has awakened media interest in the scandalous Payday Loan industry, which has grown exponentially in recent years with the arrival of overseas companies setting up shop (quite possibly because of the light handed regulatory environment of the non-bank lending sector and the low level of financial literacy in New Zealand).

Payday loans are short-term unsecured loans of small amounts intended to get the borrower though to the next payday, but generally they have a maximum term of a month or two. According to the website of the lenders, typical examples are paying for groceries, power bills, vehicle breakdowns, and the like. The reality is there are probably a host of other reasons why desperate people end up at the doorstep of these usurious lenders. They usually start out of small amounts – just a few hundred dollars, and every lender has different terms, but they do have one thing in common – outrageously high interest rates: 500% per annum is not unusual.

That means for every $1,000 these Payday lenders have out, they will receive $6,000 back by the end of the first year. If they invest that $6,000 at the start of year 2 they will end the year with $36,000 by the end of year 2, and $216,000 by the end of year 3, and just under $1.3m by the end of year 4, and that’s from an investment of just $1,000.

From what I have seen there’s nothing illegal about what these lenders do. They don’t even lurk in the shadows as one imagines. They are quite upfront and open about the terms. For example, Payday Advance have this statement of their website:

“Annual Interest Rate (AIR). Our AIRs range from 520% to 624% p.a. or approx. 1.42% to 1.70% per day. Implications of Non-payment. We encourage loans to be repaid in accordance with agreed dates, however in the event of a non-payment (or other default) the following applies: Fees - A fee of $50 applies to each missed or failed payment, a fee of $10 for each reminder letter & a fee of $10 for each week you remain in default. Default Interest - applies to any overdue amount at 104% per annum. Collection practices - We will promptly contact you regarding any missed payments and we undertake to manage collection of our loans in accordance with legal requirements and industry standards. Credit Score implications - When/where credit scoring is used in NZ a repaid loan will most often positively influence your credit score. However when a missed payment, failed payment or unpaid loan occurs this is likely to negatively impact on your credit score. Renewal policy - Renewals are not automatic and are available on loans (other than your first loan) where your past payment history is satisfactory to us and are subject to our discretion. A fee of $20 applies.”

Handy Cash publish this financial health warning: 

This website only offers short term loans. Short term loans can be expensive and may not solve your money problems. There may be cheaper borrowing options and/or other assistance available to you. For example, if you are on Government benefits, ask if you can receive an advance from WINZ. To decide if this product is right for you, please review our website carefully.”

Cash Converters advised they have a daily rate of 1.315% (480% a year).

Many of the lenders say their loans are a way for borrowers to “take control of their finances”. Borrowing money at 500% interest rate is NOT taking control of your finances! It’s actually digging a bigger hole and creating financial poverty.

According to the introduction to the Bill being introduced by central government, “The Bill provides that the primary purpose…is to protect the interests of consumers in connection with credit contracts, consumer leases, and buy-back transactions of land. The [Bill] also aims to promote confident and informed consumer participation in markets for credit, and fair, efficient, and transparent credit markets.”

In fact, the proposed changes will do nothing to alter the fact that Payday lenders are charging 500% interest rates to desperate individuals. A quick review shows that these lenders are already disclosing, at least on their websites, the absurdly high costs of their lending. In its current form, the new legislation will change nothing.

Surely there is nothing acceptable about a 500% lending rate and it’s a disgrace that central government would turn a blind eye to it. Some may say let the free market work and if people want to pay 500% interest then so be it. The free market principles are based on people acting rationally and of their own free will. There is nothing rational about desperate people paying 500% on a loan to buy groceries, or to satisfy an addiction.

Public submissions to the proposed changes close on 1st of November.


Brian said...

These "loans" are obscene, but as Frank says "Not illegal". The reason why people are seduced into borrowing at these rates is not only to cover expenses incurred to run a household; but the inability to suppress the urge to spend.

For decades socialists have been constantly telling people that they have a equal right to whatever others have. They might be well advised to change their tactics, although this might remove a excellent political weapon at election time.

It comes down in the end to one thing, bad financial management and of living beyond your means. "Keeping up with the Jones's"!

Well, both Central and Local government have set very bad examples in this respect. So perhaps before the Government does something about this problem, they should set a better example themselves in the field of financial management.

So it all comes down to budgeting and keeping within a set budget. It should also come down to perhaps a dictum hateful in any democracy...that of some institutional control over personal spending on those who unable or unwilling to curtail their spending.
A job here for Statesmen, not Politicians.


Bee said...

I'm a white middle class open minded guy. I lived in one of the poorest suburbs in the country in the 00's with my boyfriend (actually less homophobic than the middle and upper classes). I know only too well what really goes on. It has nothing to do with the low income = dumb equation that the other person has said. Or some uncontrollable 'urge to spend' a comment from someone who has no idea of the realities of being a hard worker with a low income in a free market society. The people living there are just as smart as people living any where else.
While living there we used to get about 5 or so advertisements in the post everyday selling money lending from companies we had never heard of stating that we qualified for an immediate loan of $500 no matter our credit history. These huge trucks full of everyday consumables would drive the streets selling items like nappies at hugely inflated prices on credit making money off the fact that if your low income and have no car it can take a half day to do the shopping and then walk home with it hoping that you don't get caught leaving the kids at home as their too young to handle the journey. Even with the best budget in the world, a low income in New Zealand is not going to stop you needing credit to survive in the city. You can be working two jobs day and night on low income in the city and it is no where near enough to survive. The point that Im making is that these credit agencies are pushing debt on people, not people bang on their doors begging for debt. They push their lending - fo reals.

Anonymous said...

It would seem that the author of this article needs to go back to school - the math on what $1,000 turns into is just plain wrong.
Oh and of course there are no expenses to provide this credit.
Write a fair and balanced article.
People need credit - technology speed up the need and the supply of credit. People should be free to make informed decisions - this exists today under current laws. Just enforce the laws on companies or individuals that are not complying....

Frank Newman said...

Hi George, the numbers relate to the top line, not the bottom line after expenses. Of course there will be costs and no doubt high bad debts which will erode the obscene profits.

You are missing the point of the article. Yes, people do need credit - they don't need it at 500%! No rational person would borrow money at that rate. They obviously have a problem of some kind - a drug addiction, a mental disorder, an inability to read or comprehend, whatever... they have a problem and need help. These “Money lenders” are not helping them – they are preying upon them.