Payday Lending – The Wrong Approach

Saturday, 17. August 2013

Hi, Graham Hill here, thank you so much for visiting my blog, I hope you learn a lot and as a result end up driving a great car. In order to do so you can get all the information you need by buying my book, An Insider Guide To Car Finance or use me to finance your next car. Happy driving.
Image representing Wonga as depicted in CrunchBase

Image by None via CrunchBase

Who is the worst payday lender? I’m not sure of the answer to that one myself but certainly the most honest seems to be Wonga. I have written a new book that will be launched soon in my Simple Guide series called APR – A Simple Guide.

Amongst many crooked activities revolving around the abuse of APR I talk about payday loans. I agree with a comment made in Credit Today when they suggest that instead of displaying a ‘representative APR’ in their adverts, payday lenders should display ‘lots’ and leave it at that for the usefulness it provides.

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I give an example in the book of a call made to a Payday lender who quoted a representative APR of, I believe 2,450%. However this is the rate if I borrowed money on the 1st of the month and repaid it on the 31st. After questioning a very nice chap on the phone before he hung up on me he gave me the amount of interest I would pay in cash terms if I had the loan for a complete month.

However, when I explained that it was less than a week to my payday, would they still charge the same fee that I would pay if I had the loan for a month, the answer was yes. When I explained that this reduction in time would seriously affect the APR the phone went dead. Everything about APR is a joke and is completely misused by those lending and misunderstood by those borrowing.

Recently Wonga, in an attempt to reflect more closely the borrowing of their customers, changed their worked example in their advertising by moving from £207 over 20 days (£47.20 in charges) to £150 over 18 days (£33.49 in charges). Nothing wrong with that you might think, if anything it is taking an honest approach to their lending, tell it as it is.

But unfortunately because of the ridiculous way that APR is calculated on short term loans it moved the APR from 4,214% to 5,853%. As a result the press had a field day, balloons went up, old people had sticks waved at them as they were identified as the old kindly people in the Wonga ad and brown, rather smelly stuff, was thrown at the office fan of many journalists as they fought to condemn Wonga.

The Daily Mail said, ‘Payday firm’s 1,600% rise leads to calls for tighter regulation.’ The Guardian also noted the rise with ‘Increase calls for a cap on the cost of short-term credit.’ In my book I’m calling for a massive change in the way that the world measures credit and this furore strengthens my resolve because APR is total nonsense.

Let me break this down for you without giving away my new approach to lending. Faced with a rise of 1,600% in the interest and charges that we would now be expected to pay, as illustrated by the Wonga example, you and I might throw a tantrum but what does it really mean?

What caused there to be hundreds of column inches to be written in the press about this massive rise in interest? If you take the first example from Wonga and break it down you will find that you will pay £207 over 20 days, or £1.14 per day per £100 in charges. In the second example you will pay £1.24 per day per £100 in charges. So this extra 1,600% amounts to ten pence per day per £100 that you borrow.

The massive reaction was over 10 pence per day per £100 borrowed. What a bloody nonsense – read my book when it comes out, you are in for some shocking revelations!

Oh and before you get the wrong impression I’m not a big fan of payday lending but if properly controlled with full disclosure there is a place for it for those struggling with their finances. Official statement over!

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