Payday loans – the Americans are here!

Workers, especially low paid and unemployed workers, are always expected in capitalist society to pay the most for everything.  A greater percentage of what income they have goes on putting a roof over their heads, clothes on their backs or food in their mouths – and this fact leads them to ‘need’ credit more than other social groups.  Of course the wealthier in society use loans as well (usually with quite low interest attached to them), huge enterprises use loans to gobble each other up and as a tax avoidance measure, well-paid individuals may use loans to purchase houses and cars to spread costs etc., but that is not the same as the need felt by the poorest sections, whose income just doesn’t meet their daily living needs and who, with little or no ‘collateral’, have to turn to the lenders who demand the highest rates of interest in return for the ‘loans’ they ‘give’.

Agents of loan companies such as ‘Provident’ have roamed around council estates for years offering short-term, high interest loans to those they knew would struggle to pay back the inflated amounts and who would probably take out further loans to try and service their debts and keep their heads above water.  These agents, still referred to as   ‘tallymen’ by older residents, often themselves live on the estates and usually know the people that they are leeching off.  The purpose of this is that ‘poor’ payers can be hounded and embarrassed within their community at various times of the day making it rarely necessary for the lender to have recourse to the legal profession to recover sums owed.

The Provident repayment rates have an extremely high Annual Percentage Rate (APR) with a loan of £100.00 requiring £149.50 to be repaid over 23 weeks, that is, £6.50 per week at an APR of 545.2%.  If the borrower opts to pay that £100.00 back over 52 weeks instead, the amount to be paid back rises to £182.00 (82% more than the original loan) but the APR falls to ‘just’ 272.2%.  However, these high rates have been totally eclipsed by an American invasion.

Tighter legislation in the USA around short term (payday) loans has brought a host of American ‘legal’ loan sharks across the Atlantic looking for huge profits from Britain’s poor, as this country has among the loosest regulations in the developed world in this particular area of usury.

Among the main players in this ‘legal’ scam are DFC Global (trading here as Money Shop, Cash A Cheque, Payday Express and Money Mart), Cash America (trading in Britain as Quickquid), Think Finance (Paydayone) and  Around 4 million people in this country are believed to have taken ‘short term’ loans with APRs of between 500 and 5,000%.  These loans, though called short term, are very often ‘rolled over’ i.e., the borrower is lent the money to repay the loan, incurring further, often increased, charges and rates that rise to ever more exorbitant levels.  Effectively these loans are often medium to long term yet still carry astronomic rates of interest.  These companies, while willing to allow borrowers to dig themselves deeper and deeper into debt, do not linger for a second in rushing borrowers into the law courts when they finally cannot repay the original debts and rocketing interest.

The Government will certainly not be in any hurry to bring in any legislation that hinders the ‘profits’ of these bloodsuckers but, as is always the case with any bourgeois party in power, they will nevertheless present themselves to the public as ‘seriously concerned’.  The consumer affairs minister, Liberal-Democrat Ed Davey, when asked about Britain being a soft-touch for US loan sharks, stated: “If there are companies who think that we’re laying off and not taking notice, well, they’d better beware, we are hyperactive in this space, we realise that there is a problem and we have inherited a disastrous legacy from Labour!”  So does this mean that legislation to protect borrowers will be forthcoming?  His bourgeois-politician reply is characteristically evasive:  “It is really important that we get it right.  People do need this money and you have got to remember some of these payday lenders offer a very good service for people.  To say all payday lenders exploit people would be wrong”, he continued, finishing with a vow to promote credit unions as he believed: “Rather than regulation, competition can be more effective.”

The loan shark industry is trying to counter the bad press that they have received of late.  Caroline Watson, Corporate Affairs Director of the UK wing of DFC Global (mentioned above) and also the President of the Consumer Finance Association (a payday lender trade association), while trying to convince anyone prepared to listen that customers of the Payday loan purveyors really liked the schemes because banks were seen as expensive, said: “We wanted competition against the banks, we’ve got competition against the banks in the form of the payday loan, and now there’s an outcry that its too expensive – and yet it’s cheaper than the banks.”  This line is also being taken by others in the payday loan pack, who, by law, have to include the APR in their adverts and on their websites.  They all claim that the APR figure, incredibly high for all of them, is really misleading as their loans are short term and the APR is worked out as an annual rate.  Quite apart from the fact that many of these companies have no limit on the number of times the loans can be ‘rolled over’ (meaning that it is quite possible, and not uncommon, for payday loans to be paid back over a very long time), there is another reason why the APR is relevant to these loans.  The APR is the only way to measure loans of different amounts and repayment lengths against each other. Let us, for example, look at the claim that the APR of the payday loan only appears large because the money is only lent for a short time.  For the purpose of this we will, instead of looking at what the interest of the Payday loan would be over a year, look instead at what the interest would be on a normal loan over the shorter period. do a five-day loan of £100 which carries a £10.00 charge.  Forgetting banks with their much lower APR, let us compare the Wonga loan with one of the most expensive credit cards, Vanquis Visa.  Vanquis Visa has an APR of 39.9% but do not do five-day loans, so if you borrowed £100.00 from them it would be with a month to pay back and the charge would be £3.00!  Quite how Ms Watson can claim her Payday loan gang are cheaper than banks we cannot see.

The sad reality of the post Christmas period is that so many workers, both employed and unemployed, are much deeper in debt thanks to these and other financial parasites of the capitalist system we live in.  A pre Christmas report by the charity ‘Family Action’ highlighted the excessive charges foisted on the very many poorest working class families.  Those who try to avoid debt by saving for Christmas by prepaying for groceries through hamper companies can pay as much as 200% more for their food, as well as incurring a potential loss of interest on savings.

Those who buy through catalogue instalment plans can end up paying twice as much for the same items as is charged in the shops.

Britain has one of the highest levels of household indebtedness in the developed world, and although this is now also affecting the middle class more and more, it is still the working class that really carries the can for this inadequate system.

There is a lot of money to be made from the impoverishment of the masses of workers, but workers are also consumers and their continuing impoverishment just adds to the severity of the crisis that is now engulfing capitalism – bringing a revolutionary situation closer every day.