Legal loan sharks are clever, modern, and should be tightly regulated. Until a year ago I knew nothing about payday loans. Of course, I had heard about loan sharks and I knew of the murky underworld where desperate people seeking immediate cash could get it quickly from back street dealers. I also knew that if you did not repay your loan, persuasive people with black gloves and baseball bats would come round and make you an offer you could not refuse.
The Oxford English Dictionary defines a loan shark as a ‘moneylender who charges extremely high rates of interest, typically under illegal conditions’. The name ‘loan shark’ is ugly and visiting thugs are hardly cuddly, so many of the new breed have spruced up their image and are now legal: like any good marketing company they have rebranded their product. Today their offerings are called ‘payday loans’ and if you do not repay it is no longer baseball bats, but the bailiff, coupled with stressful and incessant telephone harassment. Michael Corleone would be proud.
The advertisements on buses, the football team sponsorship and the plethora of payday loan shops opening on our high streets are testament to the fact that over four million people are using these loans and that the amounts advanced exceed £2bn. This is an industry that is enjoying stratospheric growth – no double-dip here. It is a world of companies with jaunty, blokey names like Quick Quid, Money Shop, MyAdvanceLoans and Wonga.
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 many of them it becomes a never-ending cycle of payment, repayment, payment, repayment – shuffling credit cards, borrowing from one payday loan company to meet the endless demands of the other. All the time the inexorable clock of compound interest keeps ticking away. It is a Kafkaesque nightmare. The words of Hotel California keep buzzing in my head – ‘you can check out any time you like, but you can never leave’.
Coming from a background in information technology, I was particularly intrigued by online payday loan companies. Each one operates on similar lines but the daddy of them all is Wonga. It is absolutely brilliant: in user-friendliness it is right up there with Apple and Google. To test it out I decided to borrow £300 for a 21-day period. It was so easy. They wanted my personal details, where I live and where I work as well as details of my debit card.
Wonga were able to instantly assess my credit rating, which enabled them to accept or reject my application. They highlighted the fact that they offer ‘straight talking money’ and that they promote ‘responsible lending’. To their credit they are transparent and there are no hidden charges. 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 clearly and upfront that I would have to repay £365 in 21 days’ time. This represents an APR of 4,214 per cent – no wonder they are so successful.
Payday loan companies are obliged by law to display their APR but they do not like it. Most claim that APR is an inappropriate measure – after all, they say, ‘how can you apply an annualised rate of interest to a loan that lasts for just a matter of days?’ This is a nice try, but totally and conceptually wrong, and they know it. The only comparative measure used to calculate the difference between a loan made and the amount repaid is called annualised compound interest – this is as true for a loan of one week as it is for a loan of a hundred years.
I am now working with my parliamentary colleague Stella Creasy to introduce an amendment to the financial services bill which will give the new Financial Conduct Authority the power to cap interest charges. We both recognise that payday loans are a necessary evil, all the more so in these straitened times, but we feel that parliament needs to introduce legislation to regulate the amount these companies can charge. Most of all we need to offer some level of protection to the vulnerable in our society.
George Osborne is fond of using the expression ‘morally reprehensible’ – I think it is morally reprehensible that payday lenders are allowed to advertise their products. It is bad enough that desperate people have little option but to take out loans at these iniquitous rates of interest, but to encourage them to do so strikes me as wrong. Fluffy puppets, catchy lines and happy smiling families are all very well when advertising iPads, but to see them used to draw people deeper into debt cannot be right. This type of advertising needs to be banned – but that is for another day.
Parry Mitchell is a shadow business minister in the House of Lords.
This article first appeared in Progress Online on 4 September 2012.