FAST. INSTANT. Easy application. Available within an hour. These are some of the words and phrases used to advertise the rapidly increasing business of ‘Pay Day’ loans. Apps are even available on the iPhone to make the application process even simpler.
Surprisingly enough in this so-called modern era of global financial responsibility you can very easily find a lender that promotes ‘No credit check required’. All suggest that they are committed to responsible lending, yet at the same time actively promote their services suggesting that no documentation is required and credit checks are not necessary. There is nothing responsible about that.
I know a number of people who made fortunes out of the sub-prime market, sold their businesses at the right time and benefitted greatly. A number of these are back offering payday loans. After the demise of Lehman Brothers and the ensuing credit squeeze, the rest of us were just left with the tab; let’s not recreate the same problems.
Admittedly the sums involved in most payday loans are much smaller but they still follow the same premise; those supplying the loans make a fortune, the majority of those accepting the loans face more misery and hardship. Thankfully, the phenomenon hasn’t really struck these shores, at least yet. If you search online for this type of service in the Republic of Ireland, you typically find only two sources; one of those is the credit unions who are heavily regulated and who are, in my opinion, definitely motivated towards the best interests of their customers. The interest rates that they charge are amongst the most competitive in Ireland and they clearly operate for the good of community.
“Clearly extortionate rates”
The other lender operates at the other end of the spectrum as regards interest rates but nowhere near the clearly extortionate rates that exist in some jurisdictions.
A payday loan is a small, short-term unsecured loan regardless of whether the repayment of the loan is linked to a borrower’s payday. To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender can charge.
Certain jurisdictions outlaw payday lending entirely but unfortunately there are a number of countries that have very few restrictions on payday lenders. Different jurisdictions have different regulations as regards payday lending; some take a far more commonsense approach to the subject.
In the Australian states of New South Wales and Queensland there is a maximum 48 per cent APR maximum loan rate which includes fees and brokerage.
In Canada any rate of interest charged above 60 per cent per annum is considered criminal according to the Criminal Code of Canada.
In America, payday lending is legal and regulated in 37 states, either illegal or not feasible in another thirteen.
“The UK has got this wrong”
In the UK – our closest neighbour – payday loans are a rapidly growing and profitable business. In 2009, 1.2 million people took out 4.1 million loans with total lending amounting to £1.2billion. Surprisingly there are no restrictions on the interest rates that payday loan companies can charge, although they are required by law to sate the effective annual percentage rate (APR).
The UK has got this wrong. This is an area that requires more regulation and the effective loan rates stringently capped. Payday loans do carry significant risk to the lender as the instances of default are reasonably high but the excessive interest rates are obviously a contributory factor.
The Consumer Credit Counselling service in the UK has said that the number of people seeking help after getting into trouble with five or more payday loans has trebled in just three years. Amongst those desperate borrowers were 200 people with at least ten loans each. There is little doubt that this is the most toxic form of credit that you can access.
The most severe case the CCCS has dealt with is the couple who had t36 payday loans, totalling over €22,000. One payday lender is actually charging a representative APR of 4,640 per cent. Shocking! Unfortunately it is very easy for a borrower to take out multiple loans because very few of the estimated 200+ firms operating in the UK file details of customers and their borrowings with credit rating agencies.
“Protecting these shores”
It’s rare for me to congratulate the Central Bank and the Regulators in Ireland but in this area they are doing well in protecting these shores. Several sub-prime lenders did slip through the net a few years ago and those that unfortunately experienced them will know that when things started to get difficult after the collapse of Lehman’s, the bank bailout and the ensuing difficulties with credit, these lenders were by far the most aggressive in seeking recovery of their monies.
It is also no surprise that these same lenders were responsible for more than their far share of repossessions and evictions.
This type of lending is something that the Government, Central Bank and regulators should continue to strongly oppose.
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