Retailers are reporting gloom and doom on the high streets of Britain, but there is still one sector that is expecting to do big business this Christmas: payday lenders.
Online lender Ferratum claims that more than 2 million people have already applied for payday loans, and Ian Porter, the company’s UK sales and marketing manager, says: “We are already seeing a significant increase in applications for our micro-loans and we still have weeks to go until Christmas Day.”
Payday loans – the lenders prefer to call them short-term or micro-loans (a term more commonly associated with tiny loans to women in developing countries to help them start home businesses) – are designed to tide borrowers over until their next pay cheque. The money is usually provided quickly: Wonga boasts it can decide in seconds whether to lend and pays cash into your account within 15 minutes of a loan being approved. They are designed to be paid back quickly, usually in a month or two.
Payday loans incur enormous rates of interest – Ferratum charges a typical APR of 3,113% while Wonga, the highest profile payday lender in the UK, charges 4,214%. Labour MP Stella Creasy, who has campaigned for tighter control of high cost lenders, describes such firms as the “legal loan shark industry”. But the lenders say APRs are an inappropriate measure, as they are distorted by the short length of the loans.
Charges mount up when the borrower is unable to repay the loan at the end of the month, or can repay but immediately needs to borrow the same amount again. The lenders all claim to select their clients carefully, choosing only those who are able to repay. Wonga says it uses thousands of pieces of data available online to check the suitability of its clients. Ferratum says it has received applications from people with many different occupations including solicitors, doctors and nurses.
But Itisam Akhtar, manager of My Home Finance in Birmingham, a low-cost alternative to payday and doorstep lenders established by the National Housing Federation, sees it differently. He says: “The majority of our clients are on benefits. We look at [potential customers’] bank statements, and we’ve seen many payments to payday lenders.”
It was reported recently that there has been a fourfold increase in the number of people with payday loans coming to its bureau for help with debts. Gillian Guy, CAB chief executive, says: “On average, clients with payday loans had eight debts, while those without payday loans had five. Evidence suggests a pattern of people in long-term financial difficulty with other debts, who are much more likely to take out a payday loan to try and deal with these problems.”
So what are the cheaper alternatives to payday loans?
In the past five years, credit unions have made about 500,000 loans to higher risk borrowers, 80% of whom are claiming benefits. Whereas Wonga charges about 1% a day, loans from some credit unions will cost no more than 1% a month – an APR of 12.7% – up to a maximum of 2% a month or 26.8% APR. This means someone borrowing £500 for a year would pay a total of £534.06 at the lower rate, and £569.55 at the higher rate.
Credit unions have had a fusty reputation in the past, restricting their membership to people in certain professions or to small community groups. They were of little use to someone needing to borrow money in an emergency, as they required borrowers to save for weeks with the union before it would consider lending to them.
However, five years ago the government made £100m available through the Growth Fund, which has enabled credit unions to become more flexible, start assessing risk properly and lend to people without a previous membership or savings record.
Mark Lyonette, chief executive of the Association of British Credit Unions, says a £300 loan from a credit union would save a borrower £200 on the cost of a typical doorstep loan. “We are encouraging borrowers to use some of that difference to start saving: not all of it, just £2 or £3 a week. It means that by the time the loan is paid off, they have a pot of about £50 which can make all the difference to their self-confidence and esteem,” he says.
There are 420 credit unions around the country, of which 120 are lending from the Growth Fund. To find out more go to www.findyourcreditunion.co.uk but remember: you will still have to become a member of the union to borrow, but in some cases you will no longer have to save with it.
My Home Finance
This scheme was launched in the autumn of 2010 to lend to people who are financially excluded and normally have no option but to borrow from payday and door-step lenders. The lender charges a typical interest rate of 69.5% APR, which might sound high compared to credit unions, bank loans and even credit cards, but Tess Pendle, head of My Home Finance, says it reflects the risk of lending to higher risk customers.
Clients are interviewed by a My Home Finance adviser about their finances and their bank statements are checked to work out what size of repayments they can afford. Only those who are bankrupt or simply cannot afford a loan are likely to be refused.
There are just 10 branches so far, all in the Midlands, but Don and Liz Hackett, who have taken out three loans with My Home Finance, think the scheme should be extended nationwide. The Coventry couple, aged 64 and 55, are older than the majority of My Home Finance clients: Mr Hackett retired early from his job as a lorry driver through ill health.
He tried to borrow from a high street bank four or five years ago, but because the couple were on benefits and his credit record was bad, his application was rejected. The couple have borrowed from doorstep lender Provident Financial, and are still paying off a £300 loan taken out a year ago, at the rate of £10 a week. But My Home Finance is much cheaper, and they have a good relationship with their adviser.
Mr Hackett says: “We have just taken out a £389 loan to pay for Christmas presents for the grandchildren (we don’t buy presents for the grown ups) and food. We’ve got 10 people coming for Christmas Day. One of my sons is getting married next summer, so if we’ve paid off this loan by then, we’ll take out another one for the wedding.”
What else to avoid
■ Weekly payments shops such as Brighthouse or PerfectHome. They enable you to buy electrical goods and furniture immediately and pay in instalments, but the total cost is far higher as a result. They also try to sell you accidental damage and theft insurance, which pushes the total up astronomically. At PerfectHome, for example, the label on a Hotpoint fridge/freezer says the cost would be £579.99 at 29.69% APR, and the customer could buy this over 156 weeks at £5.34 a week – a cost of £833.04. The “optional” Coverplus policy costs a further £984.75, taking the weekly cost to £9.06 or £1,413.36 over the three-year repayment period.
■ Unauthorised overdrafts. The Consumer Finance Association is fond of quoting how much these cost compared to its own payday lender members’ charges, which gives you some idea of how astronomical they are. It cites the cost of an unauthorised overdraft of £200 from the Halifax, which incurs a daily fee of £5: “The actual APR of the overdraft transaction is 90,888.9%.”