“Psst! Wanna loan? Only 2500% APR …”
Payday loans are poisonously expensive debt wrapped in sugar-coated brand and service for poor and desperate people. They’re innovative…and they stink.
The idea is to offer small, instant, loans with terms of a few days or weeks to “hard working” (i.e. poor) people with an “easy” application process on a “friendly” website with an approachable brand. This Wonga.com (daytime) TV advert captures the tone of voice:
Payday loan providers (or should that be “pushers”?) say that APR isn’t meaningful for a product with such a short-term. On an annualised basis, it would cost over £1,000 to rent a DVD for a year, but nobody accuses Blockbusters of exploitation. But then, nobody ever became dependent on Blockbusters.
An Office of Fair Trading report (here) shows that vulnerable customers often use high cost credit continuously. A constant or frequent loan at 2500% APR or more is the financial equivalent of a crack addiction.
Payday loans are not the only businesses that make small, short-term loans to the poor. So do credit unions and so does the Grameen Bank, the micro-credit institution founded by Nobel prize winner, Mohammad Yunus. But whereas micro-credit lifts people out of poverty, payday loans can help lock them in.
What banking desperately needs in the post-credit crunch social and political environment is the inventive product development of the Payday loan companies and the compassion of the Grameen Bank.
These loans are the evil twin of micro-credit, so the last word goes to Mohammad Yunus:
“It’s not people who aren’t credit-worthy. It’s banks that aren’t people-worthy.“