Pay Day Loans: Helpful or Hurtful?

With the economic downturn in full swing and people struggling to get by it only takes a few hours of television watching to come across this guy...

*Earl from Wonga

         

He promises a fun and easy way to get a little bit of cash that you need when you have a bill due before your paycheck.

The cost? Well on Wonga's website, a 400GBP loan for 30 days costs £125 ! More realistially though, a £100 loan for 5 days costs only £10....

Below is a list of Wonga and it's rival's typical APR.

  

Payday UK	1737%
Quick Quid	1734%
Wonga	4214%
Payday Express	1737%
Kwik Cash	1737%
UK PaydayToday	1737%

Wonga (after a $3m investment) is already in profit and apparently only issues money to 20% of applicants, leading to an exceptionally low default rate (when it first became mainstream I had a bet with a friend that this firm would never be profitable. Shows what I know!).... Despite the lack of a physical presence that would allow local pay day loans to threaten non payers, Wonga has an OTT algorithm that assesses a persons creditworthiness and I guess the proof of the pudding is in the eating.

QuickQuid is another heavily advertised service which is actually an offshoot of a listed American money lender, Cash America. Over the past three years, revenues at this company have increased at light speed ($23m to $100m in 2 years of operation - net income on this level cannot be obtained).

*Cash America Annual Report 2010

It's nice to know that they are making money :s but is it simply a business that preys on the uninformed and the desperate?


1. With such eye popping APRs you could easily ask why these people don't extend finance on their houses, use an overdraft or even a credit card, all of which carries a much lower APR.

The proponents would argue that the APR rate is misleading. After al,l these payday loans are not meant for long periods of time and so a better way to look at it would be a £10 charge to settle a £100 bill. The APR is simply noted as part of regulation.

Why do people not take finance with either cheaper methods? Well for one, these financial needs are short term in nature and organising an extension of finance using more traditional channels may take up to two weeks. Furthermore, these people may not even have the credit rating required to use more traditional methods of finance and so how else are they going to pay a bill?

2. These companies promote financial irresponsibility by supercharging the buy now pay later crowd, whilst potentially opening customers up to a vicious debt spiral.

Once again the vendors would tell us that they make sure that they do their research on each customer and their stringent criteria refuses loans to those considered fiscally irresponsible. They could loan money to every schmoe in the country and their balance sheet would explode with accounts receivable. The problem is that many customers would't repay and then the vendors wouldn't have a business. It is therefore in the interests of both vendors and consumers that only more responsibile people use this service.

Unfortunately there will always be a few that keep rolling over debt and even realising the full APR - turning a £100 debt into a £5000 in a short space of time. Cash America tells us that they recognise when people have trouble paying and come to a mutual plan of repayment that may not include the full APR.

At first glance, I must say I was against the idea of pay day loans but thinking about it, as long as the country adds a degree of regulation to help those people who use them beyond the scope of the deal (as in rolling over month by month), I guess they do provide a niche service which is useful.

Banning Wonga from operation on the above grounds would be no different to banning casinos from operation. As we all (should) know, the house always wins in the long run. Therefore, gamble too much and you WILL lose money. Of course there are always a few that feel they can beat the system and spend their life savings on trying to do so (similar to those people who overuse pay day loans) but the highly regulated casino industry provides a lot of help for people that may have addictions as well as refusing them from gambling altogether.

You will always get some people falling through the net, but unfortunately, as old Blue Eyes says, 'That's Life'


What do you think? Good do or Crap do?