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An explosion of payday loan firms

There’s this new phenomena emerging of high interest loans.

For some people they are shocked by such developments.

For me, it’s a natural thing.

What am I talking about?

Wonga, Quick Quid, Pay Day Bank, Wage Day Advance and more are all out there now, many of them advertising heavily on the box such as QuickQuid …

… and PayDay Bank …

They all seem the same: get a fast loan after a few clicks; but with annual percentage rates for interest of nearly 3000%, people wonder what this is all about and what makes them worthwhile?

Well, it’s pretty obvious really.

These sites are designed for graduates, workers on low incomes and those who are cash strapped come payday to cover their immediate outgoings through a bridge between the 29th or the month, or thereabouts, and 2nd of the following month when funds are cleared in their account after payday.

It’s all about short-term loans of a few days, when you don’t want to borrow off friends or whoever, to pay the rent, food, electricity, telephone or whatever else needs paying in those days between spending your wages and waiting for the next lot to come in.

Sure, the interest rates are massive, but the idea is that you’re only going to borrow for a day or two.

Now what worries is whether people really understand this, and the fact that so many sites have appeared in the last year or so.

The first that came to my notice was Wonga two years ago, and now it seems that there is a new pay day loans site out there every day.

Obviously, there’s money in this stuff is the reason for such activity.

And that’s the issue: how much is made in profit from the unbanked, underbanked and poor.

For example, microcredit has been rising but lately the sharp practices of lenders have been called under scrutiny.

In the New York Times, Muhammad Yunus – who is generally credited with inventing microfinance – writes:

“Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering.

“To ensure that the small loans would be profitable for their shareholders, such banks needed to raise interest rates and engage in aggressive marketing and loan collection. The kind of empathy that had once been shown toward borrowers when the lenders were nonprofits disappeared. The people whom microcredit was supposed to help were being harmed. In India, borrowers came to believe lenders were taking advantage of them, and stopped repaying their loans.”

Mind you, Mr. Yunus is not finding life that easy, as there are plenty of rumours and accusations surrounding his own activities right now, with the government accusing him of “sucking money” from the poor and using them as “pawns to get more aid”.

Either way, the bottom-line is this: you make money out of people who need it most, by charging them high interest rates and making sure they pay it back.

This means that many firms do make the most profits from the poor, whether Muhammad Yunus likes it or not.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Interesting how the online short term lending is only now becoming a big thing in the UK. In Scandinavia so-called “SMS loans” have been mainstream since mid-2000s. All the companies have pretty much the same business model and product so the competition is rather aggressive.
    A company here in Finland was raising money to start a p2p lending operation, but all the potential investors seemed to want to fund was online short term loans. Apparently the short term loans business is still attractively profitable.

  • Robert Hayden

    The problem is that many of these loans end up being rolled month after month, costing the borrower huge interest in the long term. There should be some sort of compulsory conversion to a longer term, lower interest payment schedule after 3 months of rolling.

  • SPQR

    ” a natural thing ” : natural ?
    Obviously, the political and philosophical gap between anglo-saxons and the continent citizens keeps widening. Good !

  • Rello

    Tuomas, do you know who the lenders are in scandinavia? Thanks

  • Phil

    I think this sort of finance has developed slightly in to a more customer friendly service. There are some wage day advance companies which I think do try to be more responsible, and I had a surprisingly good experience with the one linked, even though I’ve always been suspicious of the business and used it somewhat as a last resort.