Parry Mitchell lifts the curtain on those 'blokey' payday loan companies
4,214% might strike you and me as an outrageous rate of interest to charge on a loan, but this is exactly what payday loan companies are doing and they are doing so with phenomenal success.
Walk down many of our high streets in disadvantaged areas and you will see money shop after money shop enjoying record-breaking business. Even some of our football clubs are sponsored by payday lenders, with the Wonga stable now including Blackpool and Newcastle United. And £25 will buy your young baby a Blackpool replica kit with Wonga splashed all over it.
Until a year ago I knew nothing about these organisations. Of course I had heard about loan sharks and the illegal murky underworld where desperate people seeking immediate cash could get it quickly from backstreet dealers. I also knew that if you didn't repay your loan, nasty people with black gloves and baseball bats would come round and make you an offer you couldn't refuse.
Looking up ‘loan shark’ in the Oxford English Dictionary, I see it defined as a 'moneylender who charges extremely high rates of interest, typically under illegal conditions'. From a marketing perspective, loan shark is a horrible expression with strong negative connotations. So to spruce up their image many of the new generation lenders have gone up-market, become legal and repositioned their brand.
Now their offerings are called 'payday loans', and if you don't repay it’s no longer baseball bats but telephone harassment and the bailiff; plus the very real threat that your personal credit rating will be shot to pieces. Michael Corleone, the ultimate Godfather, would certainly have approved.
Four million people are using such loans and the amounts advanced exceed £2bn, in an industry enjoying stratospheric growth – no double-dip here! It's a world of companies, with jaunty, blokey names like Quick Quid, Money Shop, MyAdvance and of course Wonga. Need a few quid over Christmas – easy, peasy!
But I have seen another side to this fun-filled world of easy loans. I have met people whose lives have been destroyed as they have been sucked into the payday loan vortex. For some, it becomes a never-ending cycle of payment, repayment, payment, repayment – shuffling credit cards, borrowing from one loan company to meet the unrelenting demands of another. All the while, the inexorable clock of compound interest is ticking away. Indeed, the words of Hotel California reverberate around my brain: “You can check out any time, but you can never leave”.
Not surprisingly many of these companies have taken to the Internet like ducks to water. I decided to go onto Wonga’s website to ‘borrow’ £300 for 21 days. Relative newcomers, they have become the market leader so where better to start?
The process of course was a simple one.
They wanted my personal details, where I live and where I work, plus details of my debit card so that they could capture the repayment after three weeks. Wonga were then able to instantly assess my credit rating, enabling them to accept or reject my application within minutes. They highlighted the fact that they offer 'straight talking money' and that they promote 'responsible lending’. They told me that they would give me a decision in six minutes and that the £300 would hit my bank account in 15 minutes. They also told me upfront and clearly that I would have to repay £365 in 21 days. They stated, as they must, that this loan was equivalent to an annualised interest rate of 4,214%. I did not click the final ‘accept’ button.
The truth is we absolutely need payday loan companies and other lenders like them. Many desperate people cannot get credit and they must have a source one step better than the illegal loan sharks. But we must give the FCA the power to cap these usurious rates of interest with the intention of protecting those who are the most vulnerable. My amendment seeks to do that.
Lord Parry Mitchell is a member of Labour’s BIS team in the Lords
Published 23rd October 2012