Anorak News | 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 reason that Wonga and the like have such sky high interest rates is simply that it’s very expensive, as a portion of the money, to lend small amounts of money for short periods of time. And sadly, there is actually no way around this.

No, credit unions won’t change it, even profit free lenders won’t change it. Goodwill (think sorta like Oxfam shops) tried a profit free lending system in the US. It was still 240% as an interest rate.

This is just an expensive thing to do. Either we don’t let people do it at all or we’ll have to let people do it expensively. And if we don’t let people do it legally then some others will do it illegally, with all the broken kneecaps that implies.

There is no solution to this.

Posted: 24th, September 2013 | In: Money Comment | TrackBack | Permalink