Anorak | Provident Financial’s Nearly Bust, Not Overcharging On Those 5,000% Loans Then

Provident Financial’s Nearly Bust, Not Overcharging On Those 5,000% Loans Then

by | 4th, March 2018

One of the more difficult things to get people to do is make them understand the implications of their prejudices. One such is that all those Wonga-like companies offering high APR loans must be overcharging. APRs of 50%, 500%, 5,000 %, these must just be capitalist greed ripping off the poor, right?

The granddaddy of these firms probably being Provident Financial, starting out as a door to door operation well over a century ago rather than some internet upstart. But the logic and economics work the same way:

Provident Financial’s shareholders are hoping for better days ahead after the troubled doorstep lender unveiled a £331m cash call aimed at reviving the business after a torrid year.

But if the plutocrats are successfully ripping off the working man then why do they need to put more money in?

The update came alongside Provident’s much-anticipated annual results, which revealed a pre-tax profit drop of 67.3pc to £109.1m during a year that was the toughest in its 140-year history.

Well, yes, that’s a decent enough profit there. But on the capital that they’re employing it’s actually lower as a percentage than the average across British companies. They’re making less profit than normal industry, despite those sky high interest rates. Which does rather mean that those interest rates aren’t too high, doesn’t it?

The truth being that lending small amounts of money for short periods of time is a very expensive thing to do. Firstly, say you’re going to lend £100 to someone. Or £1,000? The decision making process will probably cost you about the same. So also the basic nuts and bolts of taking the application, sending the money out, setting up the repayment plan and so on. There are simply costs to doing this. Whatever, call this £10. Now note, that’s 1% of the larger sum, 10% of the smaller.

Then, of course, there’s the fact that not everyone repays all of their loan in full. whatever interest is charged has to cover that fact too. Finally, the way APR is calculated means that the arrangement fee, that £10, is counted as a fee that repeats and repeats through the year. If the loan is for a week then the APR calculation counts that fee 52 times to get to the annual rate.

A much simpler and more accurate method of working out whether these charges to borrow are too high is to look at the profits being made by those doing the lending. If those aren’t high – and that Provident Financial shareholders have to put more capital in shows they ain’t – then the lending rates aren’t too high either.

It just costs a lot to lend small amounts for short periods of time. Shrug.

Posted: 4th, March 2018 | In: Money, News Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink