Wonga etc - is this usury?

rick_chasey

woodnut wrote:

Sketchley wrote:

and market forces will drive the cost down.

mmm, the same claim was made regarding privatisation of the utilities. Of course it's impossible to prove we'd be paying less had it never happened, but I strongly suspect we would. Market forces sometimes work, but often don't. You could say Wonga is the outcome of market forces, in this case....which kind of proves the point they don't always work in peoples favour.

He's probably right.

There are pretty low barriers to entry. My boss has thought about it quite seriously. He reckons it's very easy money.

The problem is ultimately that kind of service makes money from people who are barely financially solvent anyway - akin to loan sharking. It's not, but it's not far off, and there's a good reason why that is illegal. After all, if they were able to, people would be using credit cards, not pay-day loans.

woodnut

MTB-Idle wrote:

making a profit is wrong?

No, but of course, I could counter with, "Is it morally acceptable to make as large a profit as you can, from any situation?"

SimonAH

woodnut wrote:

MTB-Idle wrote:

making a profit is wrong?

No, but of course, I could counter with, "Is it morally acceptable to make as large a profit as you can, from any situation?"

Of course it is! It's by definition the underlying driving force of a free market economy. On the other hand it is also the responsibility of a liberal governemental system to protect those amongst its people least able to protect themselves through legislation.

In this instance I think the right action would be to work out at what APR the companies could still make a (reasonable) profit and instigate loanshark regulations capping the chargeable rate at that level. Simple.

rick_chasey

Wikipedia is interesting on this subject:

http://en.wikipedia.org/wiki/Payday_loan


and from here: http://en.wikipedia.org/wiki/Loan_shark#Payday_lending

In 2001 comparison of short-term lending rates charged by the Chicago Outfit organized crime syndicate and payday lenders in California revealed that, depending on when a payday loan was paid back by a borrower (generally 1–14 days), the interest rate charged for a payday loan could be considerably higher than the interest rate of a similar loan made by the organized crime syndicate.

mtb-idle

I'm reminded of "The Other Guys" (one of my favourite recent films) where they have to hand over all their evidence of what they believe is financial wrongdoing to the SEC:

Allen Gamble: This is all the evidence we have, and I, I truly hope you take this seriously.
Don Beaman: Yes! Very much so.
Allen Gamble: From everything I've heard, you guys are the best at these types of investigations... Outside of Enron... and AIG; and Bernie Madoff; WorldCom, Bear Stearns, Lehman Brothers...
Don Beaman: O-Okay. Thank you. Thank you, Detective.

Brakeless

Sketchley wrote:

how much cash do you want? £1
how long do you want it for? 1 Days

Borrowing £1 + Interest & fees* £5.56 = Total to repay £6.56

Anyone care to work out the APR on that.

Go accidently overdrawn by £1 with some banks and they'll charge you £25+ unauthorised overdraft 'fee' plus interest.

woodnut

MTB-Idle wrote:

I'm reminded of "The Other Guys" (one of my favourite recent films) where they have to hand over all their evidence of what they believe is financial wrongdoing to the SEC:

Allen Gamble: This is all the evidence we have, and I, I truly hope you take this seriously.
Don Beaman: Yes! Very much so.
Allen Gamble: From everything I've heard, you guys are the best at these types of investigations... Outside of Enron... and AIG; and Bernie Madoff; WorldCom, Bear Stearns, Lehman Brothers...
Don Beaman: O-Okay. Thank you. Thank you, Detective.

That's gone straight on my films to see list

singleton

It's the way of the financial world though:

low risk finance = low interest rates,
high risk finance = high interest rates.

I don't see this going away anytime soon.

UndercoverElephant

Every fool has a right to be easily parted from his money.

Edited to add: I remember seeing ads on Facebook offering loans charging about 23,000 % interest.

dhope

UndercoverElephant wrote:

Every fool has a right to be easily parted from his money.

Candy from a baby

jds_1981

Rick Chasey wrote:

Wikipedia is interesting on this subject:

http://en.wikipedia.org/wiki/Payday_loan


and from here: http://en.wikipedia.org/wiki/Loan_shark#Payday_lending

In 2001 comparison of short-term lending rates charged by the Chicago Outfit organized crime syndicate and payday lenders in California revealed that, depending on when a payday loan was paid back by a borrower (generally 1–14 days), the interest rate charged for a payday loan could be considerably higher than the interest rate of a similar loan made by the organized crime syndicate.

Risk of default is probably lower when the loan is organised by a loan-shark. Therefore makes sense for the interest to be lower.

rolf_f

Sketchley wrote:

Not wanting to defend them too much, but they are playing a high risk game lending out to people less likely to be able to repay, consquently the reward (profit) if they pull it off is quite rightly equally high. Would be keen to see how much debt is outstanding or not repaid on time or written off completely and how they accout for that in the profit / tax returns.

The evidence suggests that they are running far from a high risk game. It sounds, in business terms, about as low risk as you can get (see SimonAH's quote below). A constructive, progressive society would be ashamed to allow these firms. The only thing in Wongas favour I suppose is that at least it means that it is a safer place for morons to get money from than loan sharks.

SimonAH wrote:

Out of interest I just ran a Dunn and Bradstreet on Wonga.com Ltd.

Year to end 2010 (please note that they've been expanding like hell since then, just these are the latest figures posted) they ran a profit of £16.6 million against a turnover of £73.8 million with just 47 employees. That is STAGGERING profitability on the backs of the poorest in society.

sketchley

Rolf F wrote:

Sketchley wrote:

Not wanting to defend them too much, but they are playing a high risk game lending out to people less likely to be able to repay, consquently the reward (profit) if they pull it off is quite rightly equally high. Would be keen to see how much debt is outstanding or not repaid on time or written off completely and how they accout for that in the profit / tax returns.

The evidence suggests that they are running far from a high risk game. It sounds, in business terms, about as low risk as you can get (see SimonAH's quote below). A constructive, progressive society would be ashamed to allow these firms. The only thing in Wongas favour I suppose is that at least it means that it is a safer place for morons to get money from than loan sharks.

Not going to argue with that but there are two key points, the first it always much easier to assess risk post the event, Wonga would have had to get the money to lend in the first place, that takes investers, they would have had to be pursuaded to take the risk, which to be clear is lending to people who cannot get credit elsewhere on a short term basis. You do not take that kind of high risk without high reward. The second point is that now the business model is proven the risk seems lower that should mean more people wanting to invest which should lead to competition and lower cost to consumer. Of course markets rearly adjust instantly, there maybe a period of several companies spanking it, and things might go up as well as down.

I don't want to defend them too much really but I do think the angle you need to look at this from is your last point, which is where are the people using this currently borrowing from?

SimonAH

Or...and this is important....would they be borrowing if this service was not available to them?

Bit short for a p*ss up on Saturday evening? Going to the pawn shop with your dad's watch is a big mental hurdle, but just writing a post-dated cheque against next payday isn't an issue is it?

But then next week, the money that already wasn't enough this week is £50 or £100 less isn't it, so you roll over the cheque and pay them £10 or £15 quid to not cash it this month because, well there's a couple of paydays between then and now and....

But when the cheque is due you still haven't put the money to one side have you? And perhaps you wrote another cheque? And then you're in sh1t so you go to one of the other cheque cashing places because you're up to your limit with this one....

Before you know it you owe the payday people five hundred quid which costs you £75 a month to service and you can't pay back the principle because, apart from anything else, you're £75 a month poorer....

The above scenario is exactly the pickle my brother got into last year. Yes, he's a bloody idiot, but it's alse VERY easy to do.

rolf_f

Sketchley wrote:

I don't want to defend them too much really but I do think the angle you need to look at this from is your last point, which is where are the people using this currently borrowing from?

Sadly yes! But really, money lending has never been high risk at the scrote end of the market. On the other hand, think of all those banks lending money to dreamers to open restaurants which last 2 years before they cease to be trendy and have to close down. I reckon that's the risky end of the market.

rjsterry

SimonAH wrote:

Or...and this is important....would they be borrowing if this service was not available to them?

Bit short for a p*ss up on Saturday evening? Going to the pawn shop with your dad's watch is a big mental hurdle, but just writing a post-dated cheque against next payday isn't an issue is it?

But then next week, the money that already wasn't enough this week is £50 or £100 less isn't it, so you roll over the cheque and pay them £10 or £15 quid to not cash it this month because, well there's a couple of paydays between then and now and....

But when the cheque is due you still haven't put the money to one side have you? And perhaps you wrote another cheque? And then you're in sh1t so you go to one of the other cheque cashing places because you're up to your limit with this one....

Before you know it you owe the payday people five hundred quid which costs you £75 a month to service and you can't pay back the principle because, apart from anything else, you're £75 a month poorer....

The above scenario is exactly the pickle my brother got into last year. Yes, he's a bloody idiot, but it's alse VERY easy to do.

But isn't this the sort of mess you can get yourself into even with a nice credit-checked unsecured loan from your high street bank? If you are already at your limit and it's not just a blip you are trying to get through, then borrowing isn't going to help, whether it's £100 for 2 weeks, or £10K over 7 years, if you can't afford it, you can't afford it. The problem is not so much that Wonga has particularly harsh charges, but that there is little checking on affordability.

sketchley

http://www.google.co.uk/url?sa=t&source ... nYBpNxr2AA

rick_chasey

Sketchley wrote:

http://www.google.co.uk/url?sa=t&source=web&cd=3&ved=0CHEQFjAC&url=http://www.independent.co.uk/news/business/news/wonga-attacked-for-customer-letters-7778539.html&ei=3szQT6WBCsfZ8AOGwoS1DA&usg=AFQjCNGmZ4oR2EJfm-UcNExbnYBpNxr2AA

....

There's not much evidence that they're not just slighty better behaved legal loan sharks - with loan sharky (i.e. crippling and exploitative) interest rates.

Unless anyone wants to argue otherwise?

sketchley

http://www.publications.parliament.uk/p ... 9/dm26.htm

rhext

I think as long as they are regulated to be completely open about what it's going to cost, and are unable to use illegal extortion to retrieve the cash, then there's little wrong with this. It's providing a transparent service and people need to be able to make up their own minds about whether they procure that service or not.

I know it feels wrong, but it's a sight better than the illegal loan sharks which would take its place where it not there.

jds_1981

Sketchley wrote:

http://www.publications.parliament.uk/pa/cm201012/cmselect/cmbis/writev/1649/dm26.htm

That actually makes them sound very respectable

3.16 We currently limit interest on those who do fall into arrears to 60 days. We believe there is scope for all credit providers, including the banks, to adopt such a policy to prevent debts from multiplying excessively – and we would welcome the Committee’s views on whether this should occur more generally.

rjsterry

Rick Chasey wrote:

Sketchley wrote:

http://www.google.co.uk/url?sa=t&source=web&cd=3&ved=0CHEQFjAC&url=http://www.independent.co.uk/news/business/news/wonga-attacked-for-customer-letters-7778539.html&ei=3szQT6WBCsfZ8AOGwoS1DA&usg=AFQjCNGmZ4oR2EJfm-UcNExbnYBpNxr2AA

....

There's not much evidence that they're not just slighty better behaved legal loan sharks - with loan sharky (i.e. crippling and exploitative) interest rates.

Unless anyone wants to argue otherwise?

Sorry, I still can't see how they are the devils people are making them out to be. Sure, they're no saints, but they are pretty clear about what happens if you don't repay on time: interest continues to accrue for up to 60 days, with a £20 fee for each failed attempt at collection, unless some other agreement is reached. That's pretty steep, but the loans are only meant to be for up to 1 month: if you aren't going to have any more money in a month, then this ain't the option for you, regardless of how much you need the money.