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Anorak | Payday loan firms like Wonga don’t actually make any money

Payday loan firms like Wonga don’t actually make any money

by | 24th, September 2013

I THOUGHT this was a fascinating little snippet of information. OK, it’s about the US payday loan firms, not our own, but I still found it interesting :

“In a state with a $15 [fee] per $100 [loan] rate, an operator … will need a new customer to take out 4 to 5 loans before that customer becomes profitable. Indeed, Dan Feehan, C.E.O. of Cash America, remarked at a Jeffries Financial Services Conference in 2007, “[T]he theory in the business is [that] you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”

So for the first or second or whatever times someone borrows money from a payday lender that lender is actually making a loss.

Yes, even at those 300 or 400% loan rates, they are indeed still making a loss. Which puts rather a different gloss on those rates doesn’t it?

The thing is, you see, there are fixed costs to making a loan. Someone, somewhere, has to check the information being given and make the decision. This costs money and it costs about the same amount of money whether someone it trying to borrow £200 for a week or £2,000 for a year. Thus, when you convert those expenses (recall, this is even before interest) into an interest rate that rate is going to be high.

The

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Posted: 24th, September 2013 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink