Why are these people smiling?
It’s not really clear but perhaps they’ve got an Amazing Loan. If they own Amazing Loans they may keep smiling. If they have just taken one out, lets hope they didn’t do it smiling, but out of grim determination to pull themselves back from the brink of financial ruin.
I learned from two articles by John Kavenah in the Sheet today that the micro-finance company Amazing Loans typically lends between $1,000 and $5,000 with terms of up to two years and interest rates of up to 47.5 per cent in NSW and 119.9 per cent in Victoria and Queensland.
As of February this year Amazing Loans had 5050 customers and $10.7 million of loans outstanding.
I’ve posted previously on the booming growth of payday lending in the US. And judging from this Amazing success, it looks like we’re not far beind. Should we care? Well on first principles I’m loath to interfere. This might be the borrowers’ last chance to avoid financial ruin. So why should I want to do anything to curtail that?
As Kavenah reports
The market has given Amazing Loans a remarkably high rating. The shares have traded in a range between about 15 and 35 cents over the past year, while its net asset backing at December 31 was 0.0096 cents a share.
Amazing Loans earned more from default fees in the December 2006 half than it did from interest income.
The companyâs accounts for the six months to December 31 show interest income of $218,000 and default fees of $314,000. Borrowers make weekly repayments and a $60 fee is charged if a payment is late or a direct debit dishonoured.
Like I said in the previous post.
Given that payday loans are so bad for your financial health it looks like some major irrationality going on here. Iâm thinking that the state should be taking some intelligent interest in this, if for no other reason than what I expect would be its tendency to deliver its self chosen victims into the hands of social security systems, perhaps stimulate crime in various ways and also ânormaliseâ the idea of bankruptcy by increasing its incidence.
Nicholas, do you know much about the regulatory regime they operate under? For example, do any Australian states cap interest rates?
Given the use and abuse of bankruptcy by the big end of town, why shouldn’t it become normalised? All we need to do is make sure the desperates who need payday lending put all their assets in the hands of their relatives and make undocumented “gifts” to various trusted souls.
I am baffled by the idea that “easy credit” is OK when the sums are in the millions, but $1000 to get you through to the next payday is some sort of moral failure.
Andrew,
My understanding is that there is essentially no regulation – though there is general credit regulation, which (I think) gives borrowers rights to repay loans early. But I don’t think there are any interest rate ceilings. If you imposed even quite high ones I expect it would close down this market given the transactions costs involved. Whether you should do that or not or rather try to do something else I don’t know.
As a matter of corporate strategy I’d have thought they’d do better to lower their interest rates and recoup their margins through even bigger default fees. There’s evidence that people systematically underestimate the likelihood of them ever paying those fees, while you’d suck more punters in with the lower interest rates. Plus the fee payers will be from the dodgier end of your (already dodgy) loan book so you’ll want extra compensation from them. And don’t forget the law makes you tell people what the interest rate is but fees can be buried in the fine print or even, with a suitable contract, be increased after the fact.
But then just because these people are sleazebags doesn’t of itself make a case for government intervention.
There is no regulatory regime in operation in this country, governing this or any other kind of lending product or interest rate. Privacy Act, Banking Code of Conduct and Uniform Consumer Credit Code all require through various auspices that the borrower be well and truly informed of what they’re asking for, what they’re asked to sign and why. The amount of paperwork a borrower carts away from a financial transaction, be it $1,000 or $1,000,000 would make your average tree-hugging greenie blanch in horror. As for the rates of interest on this so-called “pay-day lending”, 49% is hardly anything new. Readers would know of AVCO and AGC, two organisations which played in the micro-finance marketplace some time ago. AVCO, along with AGC, are now owned by GE, as per GE Money. Interest rates under AVCO, for example, were rarely approved under 27%. It’s called rate-for-risk lending, and given that these loans are totally unsecured, the lender retains the right to assess and weight the risk accordingly.
Derrida’s comment says it all really. This isn’t anything new in Australia, it’s just more profitable to rip off those who can least afford to be ripped off these days.
I could be wrong, but I’m sure that at least some of the States cracked down on this sort of lending (my days of FSRA accreditation are long behind me) and certainly this would be suggested by the differing rates between states. Constitutionally states still have the power when it comes to this area, it’s just that most powers (for example corporations law) were handed to the Commonwealth in the 80s.
In terms of powers the Financial Services Reform Act (2001?) there is forced upfront disclosure by law on all these products, they can still take the 40-50% in interest, but legally they have to disclose it, and if they don’t a complainant can actually have any interest charged withdrawn.
Probably the best thing that could be done for people in a position where they were tempted to consider taking out such a “payday” loan at 47.5 – 119.9% pa would be enact legislation requiring these shylock lenders to advise potential borrowers that they can declare themselves bankrupt at any time and thereby wipe their financial slate (if not their credit rating) clean and start again. But of course that would instantly ratchet up the lending risk to unsustainable levels. This sort of lending relies heavily on consumer fear and ignorance of available options.
Given the high interest rates and correspondingly high default rates, it’s extremely unlikely that any of “Amazing’s” borrowers will manage to preserve a good credit rating anyway. The vast majority of these smiling clever (not) young things would certainly be best advised to declare bankruptcy. But if they want to borrow some money from “Amazing” at huge interest rates, so they can have a slap-up party before going bankrupt and avoiding ever having to pay it back, good luck to them. Maybe that’s what they’re doing in the photo??
Ken Parish wrote:
I believe there are some restraints on the provision of credit, but payday lending has been cleverly structured to escape those strictures.
As one example, if a credit provider overstates the monthly interest payments for a stated rate of interest, there’s some sort of penalty that the firms hate. It might be that the borrower is excused from paying any interest at all.
In the late 1980s several large financial firms were caught systematically overcharging thousands of borrowers. The NSW and Victorian governments tried to crack down on them. Some well known firms, including banks, were extensively involved in these practices, while others never figured at all, which provided an interesting insight into which banks are honest.
So what if a borrower actually requires the service and avoids defaulting on any payment including a mortgage after taking out such a loan?
What’s wrong with it? Jealous of Amazing Loans’ profitability or does pointing out the high EAR make you feel smart?
Nicholas, I notice The Sheet’s report says that defaulting is central to the Amazing Loans business. What exactly do they say about that?
Well now it was only a matter of time before some enterprising small businees person got into ‘liquidity solutions’ for the economically and personally challenged aka the poor, feckless and/or careless. I mean if people persist in wanting that little bit of extra cash, if payday disappoints, what’s wrong with the enterprising little battler offering a loan to tide them over? Ever heard of ‘caveat emptor’? Anyway, a spot of early bankruptcy assists the young in experiencing the ups and downs of the new, ‘u-risk it’ economy, and provides absolutely vital experience for the world of financial balancing and juggling. And they love it.
Looks like loan sharking, feels like loan sharking, smells like loan sharking… where’s Eliot Ness when you need him?
I don’t really see a problem with it… sure, some people can get in trouble – but there are many valid reasons why someone might need a short term loan, and with wages paid monthly, some people have trouble until their next pay packet (we pay our staff weekly – they seem to prefer it that way)
Hmmm… maybe that could be worked into a business concept. Pay your monthly wage into my bank account, and I’ll pay you weekly – half in advance, half in arrears… minus a slight processing fee, of course.
“Helping you manage your money better…”
Tony – they don’t say much more about it.
Here’s the full report.
Amazing Loans earned more from default fees in the December 2006 half than it did from interest income.
Amazing indeed.
Recently I saw a television ad for a payday loan company (I can’t remember which — maybe Cash Converters?) in which it was suggested that it would be a good idea to borrow money to go clubbing with your friends on the weekend.
“it
What’s the issue here?
That some people make financial decisions others consider unwise?
That those who lend to such people expect a high return to compensate for the risk?
Surely noone is suggesting that adults should be prevented from freely entering into contracts? Whose choice is it?
Hum, I used to act for various lenders when I was a solicitor. It is amazing what kind of debt people get themselves into. It’s quite a different thing thinking about it in the abstract compared to when you’re at the coal face helping lenders repossess houses and the like. It’s pretty depressing work.
I used to say that there were three kinds of loan defaulters: the mad, the bad and the sad.
1. The sad: These were the worst ones. The loan had been defaulted on because someone had become ill, a marriage had broken up, a business had failed, someone had been retrenched.
2. The bad: It’s never a good thing if a borrower turns out to have 20 different pseudonyms and/or is in jail for fraud. Need I say more?
3. The mad (and those with understanding impaired in other ways): These are people who did not have the capacity to understand what they were doing when they signed up for a loan (because they were in denial, because they weren’t very bright, because they just never thought about how they were going to pay it back, because they suffered from a mental illness, because they didn’t understand English…the permutations are many). These cases were pretty awful too.
Some people just don’t have the ability to understand what they are signing up for (even when the lender does its best to explain). I do think that there needs to be better regulations protecting the vulnerable and trying to prevent loan fraud (see post here).
I also think that there needs to be regulation of this kind of loan. As I said in my post above, to say there is freedom of contract and people are entitled to to make their own judgments on loans assumes that everyone is a rational, financially astute person who makes judgments in their best interests. My experience as a lawyer tells me that many people are the very opposite, particularly those who get into trouble with money. The very people who need crazy loans like this are the most likely to be unable to repay. It doesn’t do the borrower any favours (they just end up in even greater financial strife) and it doesn’t do society in general any favours (just leads to despair and heartbreak).
Surely noone is suggesting that adults should be prevented from freely entering into contracts?
There are all kinds of restrictions on people entering into contracts. The question here is whether it is truly a free choice. Are these people under such financial stress that they are unable to make proper decisions? Ken’s suggestion to force payday lenders to inform people about other options such as bankruptcy is an attempt to address this problem. The fact that that would dramatically increase the risk to the lender only underlines the point that the borrowers are not currently making fully-informed decisions.
I would also suggest that if your business model depends on people being unable to pay you on time, then that’s a pretty good sign that you’re exploiting their misfortune. It’s an indication that the assumption of rational behaviour doesn’t apply, so neither should the ordinary contract rules.
At the end of the day, these operations exist precisely because there are enough stupid people out there willing to use these types of services. Money does not grow on trees, and yet there are some people who will freely borrow money through schemes like this (or rack up debts on credit cards, as a related matter) without giving any thought to how they pay the money back.
I absolutely accept Legal Eagle’s point that not everyone entering into a contract understands what they’re signing up for – one of the basic principles of contract law is the need for a ‘meeting of the minds’. Obviously that’s easier said than done, but there can be some basis for setting aside contracts where the lender has clearly taken advantage of the incapacity of the borrower. I also like Ken Parish’s suggestion for mandating that certain information be disclosed to borrowers – I think that’s entirely fair, because it does attempt to overcome the informational asymmetries between the parties.
Beyond that, I don’t fundamentally accept that regulation is what’s needed here. Additional regulation is unlikely to solve the problem – the market will simply adapt, as it always does – we’ve seen time and time again that regulation of the financial sector only encourages people to be more innovative to get around the rules. The real issue is the inherent stupidity of some people. I think education is the key here – we have to do a better job of teaching people about how to properly manage their finances. That has to start from a very early age, but right across the board, we need to do a better job of communicating rights and responsibilities to people – which ties in again with Ken’s point, as transmitting information between the parties is part of that process.
I would also suggest that people have become more biased in their preferences for today over tomorrow. Young people – of which I am one – have been rather spoilt by their parents, who have, in this wonderful era of economic prosperity, been able to go out and buy widescreen TVs, flashy new cars, broadband internet, and various other things. The end result is that their children become so used to having these things that when they come to move out of home, they seek to acquire all these things (and more) today, without really factoring in how much it all costs. Of course, tomorrow, when the bill arrives, they can’t possibly afford to pay.
Obviously that’s a broad generalisation, and clearly doesn’t apply to all young people (I’d like to think it doesn’t apply to me, for one). That notwithstanding, there’s evidence to suggest that that kind of thing is happening to some extent, and the question is, whose fault is it – the companies that give them the credit to do it, or the individuals who don’t make sensible financial decisions? I tend to say it’s the latter. But then, of course, you can’t regulate against stupidity.
Just on those saying there is no legal restrictions on loans (all types), I believe this is incorrect, but I don’t remember the limit at which the restriction comes in (5k-10k maybe??). I was the Branch Manager at a Credit Union for a short time (under 6 mths so its not on my CV, horrible job) and I wrote personal loans daily, and I distinctly remember that over a certain limit you had to have a wad of documentary evidence in relation to the capacity to pay, either under the Credit Act or FSRA, I don’t recall which (and it was at the time FSRA first came in, which was fun in itself). We were trained strictly that without properly checking capacity the Credit Union could be held liable for the loan if it was later found that capacity wasn’t there, something under law that gave the borrower redress if they shouldn’t have been given the loan to start with. I think conversely that why payday loans are always no more than X amount is to get around these legal restrictions in relation to capacity to pay. By all means, prove me wrong, but I’m 99.9% sure on it :-)
Nick, why cant we legislate against stupidity in financial transactions? after all, the nanny state is already all persuasive in just about everything else we do in this country, and as much as I oppose a lot of it, protecting the stupid isn’t without its merit as a cause?
Nick, I’d agree with you that part of the reason why people take out these loans is to get a plasma television or something like that. The issue is more complicated. It’s not just a matter of banks and other lenders encouraging people to lend money. People are encouraged to spend, spend, spend. Look at the craziness which happens around Christmas time – our economy and retailers depend upon it…
Legal Eagle,
I’m not really into moral outrage against the lenders. Perhaps I should be. It’s not a very nice business model but then it’s not only legal. It’s offering at least some people a very important service. The borrowers are the problem. They freely enter into self destructive agreements.
But given that my concern is a utilitarian or consequentialist one. It seems that the evidence suggests that this service does more harm than good. I also suspect that there are subantial social and economic externalities and that governments are likely to end up picking up their share of the tab.
It’s amazing how often I hear that. Often when referring to the stupid people who ride a bicycle without a helmet, smoke, have sex without condoms or eat McDonalds.
I’m pretty sure only about 10% of people are below average intelligence. That would explain why so many people know what’s best for them.
Duncan – I would accept that premise if the social benefits of such a policy exceeded the social costs. I don’t see any evidence to suggest that. My strong suspicion would be that, as DavidLeyonhjelm alludes to, most people aren’t stupid, and therefore most people can make sensible choices. So why do we need regulations that govern everyone’s behaviour when only a minority of people are “stupid”.
Legal Eagle – of course retailers have an interest in people spending money. They wouldn’t be doing a particularly good job if they weren’t getting people to open up their wallets.
I would argue part of the reason people (not just the “stupid” ones) feel encouraged to spend today is that they feel confident about tomorrow. If they are confident about their future income level (that is to say, their expected future earnings), then given the interest rate and their own preferences for intertemporal consumption, it’s not at all irrational for them to borrow and spend. It becomes an issue if their expectations are wrong (we can’t control the future, obviously) – but ultimately the degree to which that’s an issue depends on the risk profile of the individual, and how tolerant of or averse to risk they are. That, by and large, is already built into our decision making processes.
As amazing as the story goes, I would like to know more about how CEO Mathieson goes about his debt recovery since it is the major part of Amazing’s income.
Presumeably they hire debt recovery specialists who usually take a big percentage stake or ‘success fee’.
Serving a ‘bluey’ for outstanding money (as it used to be known) can also be done through the Court sheriff for what used to be $80 on top of the paperwork. This suggests that the government won’t be interested in regulating this awful business.
You wonder too if the unfortunate people who resort to this ‘unacceptable face of capitalism’ actually have jobs to warrant ‘payday’ loans. Seems to me that Mr Mathieson and his shareholders are preying on a sector of the market that can’t be justified by mea culpa.
Finally it must happen that the ‘foot in the door’ debt collector heavies must often confront the wrong person. We all may pay a price some day but then if we are prepared to indulge consumerism to the extent we do, why should we be surprised by what the market serves up.
oops… I mean’t caveat emptor not mea culpa. That exhausts my Latin experience.
Someone close to me has been involved in trying to regulate this industry. Their basic problem was that it is market-driven. N Gruen’s instincts are basically right here.
If you make access too hard, people just go to the real loan sharks, or worse, get kicked out of their house for want of five days. I know that sounds extreme but the fact that the system is misused in no way hides it being used for genuine purposes as well – such as someone who could pay their rent if they had next week’s monthly salary payment.
The best you can do is oblige disclosure and be moderately tough on the lenders. The Department of Justice in Victoria pushed the slogan: if it sounds too good to be true, it probably is. But the payday lenders are serving a social purpose and meeting the actual needs of many, so you have to live with them. Consider the consensus in favour of micro-credit, often at surprisingly similarly punitive rates, for underdeveloped countries.
Perhaps you can go ‘better yet’ with better financial education at schools. That might be worth a shot.
One point I didn’t immediately grasp is that Amazing Loans is not actually a payday lender, so needs to be considered differently.
According to a
Victorian report (pdf), payday lenders do have some merits. Borrowers like the fact that the debt is fixed, unlike with credit cards, and usually pay it off in two or four weeks. Borrowers also report good treatment from lending staff. The average loan is $250, and is mostly to pay bills or school requirements or undertake emergency repairs of cars. About 25 percent of borrowers are single mothers with dependent children.
Amazing Loans, on the other hand, offers larger amounts for periods up to two years. The default fee itself would be larger than some of the monthly payments, thus representing a significant source of revenue in itself, as reported.
I have heard that these sorts of firms are intimately familiar with the payment schedules for government benefits, and thus raid borrowers’ bank accounts as soon as funds become available, using direct debit facilities. This removes financial flexibility from borrowers often struggling to make ends meet, and must cause some hardship.
There is a whole class of these bottom feeders. In Victoria a reverse mortgage firm went bankrupt, leaving elderly people liable to be evicted from their homes. There were firms operating in the late 1980s that seemed to use late payments as a deliberate business strategy, immediately foreclosing the first time a payment was late. Those firms frequently targeted people like young truck drivers, and would have them use relatives’ houses as security. This requirement would be introduced to the borrower as just a piece of annoying paperwork, but of course it wasn’t, as many of those borrowers discovered.
Ninety nine percent of lawyers give the rest a bad name.
Your last paragraph covers behaviour that is now ‘unconscionable conduct’ for a bank. I believe it was the early 80s that this was prevalent, as well. I didn’t believe that this was at all common past the mid-eighties.
It is also worth remembering that, as a matter of principle, none of us are old enough to have seen a ‘mortgage’. A mortgage was an unrestricted transfer of title to a third party, subject only to the right of repayment by the mortgagee. You didn’t even always have a legal right to recover your moneys paid on foreclosure! (although you had an equitable action, and I believe in some cases there was a legal action).
What we have are various forms of title security, called mortgages for convenience. The point is that things have already improved significantly (from a consumer protection perspective). There is a practical limit to how much better things can get without penalising the intended protectees in a manner disproportionate to the benefits, and I don’t think it is far off what we have now.
The bottom line being that it’s impossible and impractical to even attempt to legislate against stupidity.
You can get a wimins only loan in the US. Look:-
http://www.womenspayday.net/paydayadvance/?promo_sub_code=CD352
http://www.womenspayday.net
Read in the paper today that IQ has nothing to do with how well you handle money. I thought about it, and I think that’s right. It’s not a question of intellectual stupidity, it’s a question of how well you think through the financial consequences of your actions, and whether you have a tendency to hide your head in the sand when financial trouble occurs. Have written more in a post here.
[…] compliant gilts and premium bonds in the UK, while Nicholas Gruen turns his financial nous to the phenomenon of payday lending in Australia. 22. SL: Nick’s post kicked off a great comments thread, and is well worth a […]
Legal – I agree it’s not IQ. It’s a bunch of cognitive things related I think to things like addiction and the deferral of gratification. I don’t know about you but I have the odd obsessional craving (biting my nails for instance). It’s hard to give up. If it mattered I guess I would. But I do understand the difficulty of it from just my mild exposure to this side of the human psyche. (This doesn’t lean me towards regulation necessarily, but does I think give me a bit of empathy for the poor mugs who can’t help themselves.)
I don’t know one way or the other if IQ levels are associated with how people handle money. That’s not really the point I’m driving at. When I use the term “stupid”, I don’t necessarily mean that with reference to IQ, but rather in a more generic sense pertaining, in this case, to the choices we make in handling money. As Legal Eagle says, it is about the degree to which people think about consequences. Certainly if you don’t think about the consequences of your decisions and actions, then I would willingly apply the title “stupid” to describe that, but if we wanted to find a better phrase than that, perhaps “irresponsible” would fit the bill.
As for the point Nicholas Gruen makes though – if people have a spending compulsion, that is more of a psychological condition in my view, which is best countered by medical treatment rather than regulation. I would also suggest that such compulsions represent only a minority of cases. More often than not I suspect the issue would be that people simply aren’t thinking things through properly – they are “stupid” or “irresponsible”, to go back to my earlier point. Nevertheless, this certainly can’t be discounted as a factor entirely.
[…] are stupid — we make choices that aren’t sensible or responsible.
I got an amazing loan, jacques commented above that perhaps low IQ people get these loans. I assure you I am not under the average IQ but was desperate! People like myself go to these places with desperation since banks are so stricy and fussy with one small default even, these loan places do not care even if your an ex bankcruptcy, I lost my job, the debts piled up, surely a small loan from amazing would help lift the burden right? Wrong, it added to the debts because the interest is so high, but its low re payments so I didn’t care at the time. we make our own choices, sometimes for the worst I know these loan sharks make millions upon millions of profit but we still turn to them in desperation, no one else would help out at the time, oh the interest is disgusting!
I got an amazing loan, jacques commented above that perhaps low IQ people get these loans. I assure you I am not under the average IQ but was desperate! People like myself go to these places with desperation since banks are so strict and fussy with one small default even, these loan places do not care even if your an ex bankcruptcy, I lost my job, the debts piled up, surely a small loan from amazing would help lift the burden right? Wrong, it added to the debts because the interest is so high, but its low re payments so I didn’t care at the time. we make our own choices, sometimes for the worst I know these loan sharks make millions upon millions of profit but we still turn to them in desperation, no one else would help out at the time, oh the interest is disgusting!
I work as a finance broker and as such am in a position to have to evaluate people’s financial positions and attempt to obtain finance for them. As much as I dislike seeing people paying interest bills as high as 136%, there is sadly a need in the market place for these high risk, low barrier style lenders. In many cases I have clients who are in transistional phases in their lives and as such can’t meet mainstream lenders credit matrix criteria e.g. a casual employee needs to be in the same job with the same employer for a period of 12 months before an application will be considered, usually they come to us because life has thrown them a curve ball which needs to be dealt with immediately. One of the regular ones is transport related, where they need to purchase a vehicle or repair one to obtain or maintain current employment. In this situation a small loan will allow a person to generate income to live, without these types of facilities available we would not be able to assist in these situations leaving these clients much worse off.
The other point to consider is that mainstream lenders are still geared towards the old fashioned idea of the full time employee staying in one job for many years when constructing their assessment criteria. Work Choices style legislation is helping to alter the profile of the typical Australian Worker so that more and more consumers fall outside mainstream lending criteria for longer periods of time. This of course will only assist in the rise of this style of micro lender.
I’m not defending Amazing loans here – I personally think they should be closed – but here is a perspective from many years in the non bank lending industry.
If the banks served all Australian Consumers equally – then non bank lenders could not exist in the market place. It is the bank discrimation that allows these secondary markets to exist. We have the current lending market place due to the commonwealth government deregulating the banking industry.
All consumers start off as mainstream customers. The majority get into financial trouble with very inflexible main stream lenders and then have to use non-bank lenders who try to pick up the pieces. Banks do not react quickly to consumers financial situations in order to help the consumer.
So the question is why don’t the banks do Payday / Microlending? Economics 101 states that if a more highly capitalised competitor can enter a free market and make a profit they will do so – yet the banks don’t, in fact they continue to raise the minimum amount they will lend – pushing consumers to credit cards.
Very simply the banks can not make a profit a the socially accepted interest rates that surround home loans for such small amounts of money.
Percent is not a measure of cost and never has been. If Percentage was a measure of cost, then we would have the % symbol on our currency – yet most consumers will only shop on percentage rate – hence why Amazing loans exists – see more below.
In a very simple example – if I lend you $100 dollars today and you repay me $110 dollars 7 days time – that is a Comparision rate (slightly different to the actual interest rate APR) under the Consumer Credit Code of 521%!!! Shock horror what an expensive loan. If a loan was advertised at 521% – well …
Now who is really charging and cashing in on Australian Consumers?
Consumer overdraws their bank account by $1.50 for one day and is charged $35 overdraw fee by the bank. Lets be honest, an overdrawn fee is nothing more than a very short payday loan by another name (very cleverly marketed to consumers and legislators as fees to make it sound nice).
When these values were entered into a comparison rate calculator it could not calculate the percents as it was too large! A manual calculation puts this transaction at around 2333% per day or at an APR of 851,666% annualised. [This was manually calculated an could not be confirmed by any calculator] . So much for a PayDay lender charging 521%. But you see my point – % does not give the consumer a clear picture of the cost of credit.
If any payday lender charged a consumer a $35 fee for a $1.50 advance there would be riots in the streets, yet due to the slick marketing by the banks it is just accepted. Why is it ok for one class of lender to make this level of profit but not another.
Here is a very simple case on why a consumer will borrow $100. A consumer knows they are going to overdraw their bank account by $14 and they know their bank will charge them $45 for the overdraw and dishonour of their rent payment which in turn will lead to a black mark with their real-estate agent or on TICA. They go to a payday lender, borrow a $100 and deposits it to their account to avoid the overdraw fee. Their rent gets paid (no black mark from real-estate agent) and they repay the payday lender $120 several days later. At this stage the consumer is $25 ahead, the rent has been paid and no dishonour has been recorded on their bank statement which would reduce the consumers likely hood of obtaining credit in the future.
Now, shock horror, the APR on this transaction is in the thousands of percent and yet the consumer saved money!! If you calculate the APR on the dishonour fee it would be in the 10s of thousands of a percent. Who is really charging the high cost credit in this case?
Now to Amazing Loans, It’s not the interest rate with Amazing Loans but rather the Loan Establishment costs which are very very cleverly worded on page one of their loan contract document. I have viewed and have copies of Amazing Loans contracts which have a 1:1 ratio of principal borrowed to loan establishment fee, i.e. $3000 loan = $3000 establishment fee – then they add their interest!!!
PS:
Ken Parish : you are danger to yourself and others with your comment that “they can declare themselves bankrupt at any time and thereby wipe their financial slate” is totally untrue. Not only can ITSA refuse the bankruptcy application in such cases, they can investigate and prosecute consumers who seek out credit and go bankrupt a short time later (normally within 6 months) of taking out credit.