Payday loans,why all the interest?

[notnow john]

Around this time last year my nephew got himself in the shit after he took out a loan with Wonga. He had only been at work for a couple of months and it was so easy, ten minutes £400 quid. He struggled to pay it back but they were very obliging an let him roll it over!

In September James broke down and told my sister, his debt was three grand!

He had been taking out loans from other payday loan companies to pay the interest on the previous loan.

Whilst he is no genius he is by no means stupid or vulnerable.

There are over FIFTY of these legal loan shark companies operating with the blessing of the office of fair trading.

Just relaying our experience in the hope it makes someone think twice and then think again.

[Rocket-Ron]

Get it cleared on an interest free credit card over 36 months. make sure his sister keeps the credit card though

[BunkMoreland]

Why all the interest? That's how they make money. The business model is a bit predatory, but as long as they are upfront about the costs what can you do? No-one is forced to use them.

[indierich06]

Around this time last year my nephew got himself in the shit after he took out a loan with Wonga. He had only been at work for a couple of months and it was so easy, ten minutes £400 quid. He struggled to pay it back but they were very obliging an let him roll it over!

In September James broke down and told my sister, his debt was three grand!

He had been taking out loans from other payday loan companies to pay the interest on the previous loan.

Whilst he is no genius he is by no means stupid or vulnerable.

There are over FIFTY of these legal loan shark companies operating with the blessing of the office of fair trading.

Just relaying our experience in the hope it makes someone think twice and then think again.

Put simply, you should never use them under any circumstances - if you can't pay the bills for the month then talk to the people you owe money to, if it's to buy some luxury item then just save up for it instead. Taking out one of these payday loans is just asking for trouble. Apart from being horrendously bad value, it's very easy to slip further and further into debt like your nephew.

While they're immoral, there's certainly nothing illegal about them - everything's there in black and white and people who get into trouble with them only have themselves to blame.

[scottthefox]

Why all the interest? That's how they make money. The business model is a bit predatory, but as long as they are upfront about the costs what can you do? No-one is forced to use them.

Think it was a play-on-words mate. Ie, why are people interested in them when the interest is so high. It's quite clever really

[AyewJoking]

I'm sure you can build up a debt that is so unmanagable that it can be written off and you are clean as the day you were born.

[Alf Bentley]

Get it cleared on an interest free credit card over 36 months. make sure his sister keeps the credit card though

This is good advice. My nephew got into a similar mess - unsurprising that many young people do, given the disparity between lifestyle expectations and income for most young people.

Also, worth referring all people new to dealing with borrowing (or indeed anyone) to Moneysavingexpert.com: http://www.moneysavi...er-credit-cards

Why all the interest? That's how they make money. The business model is a bit predatory, but as long as they are upfront about the costs what can you do? No-one is forced to use them.

Are they obliged to display their annual (APR) % interest rate, as opposed to daily/monthly rate? They certainly should be - in fact, it could be made compulsory for this to be a certain (i.e. very large) size print. If most credit cards, aside from balance-transfer cards, have an annual interest rate of 6% to 30%, God only knows what the annual rate is on these predatory loans....several thousand per cent in some cases...

[davieG]

Just in case you are tempted to borrow from WongaNewcastle's new sponsor, here are 10 things it pays to remember:

1. Wonga's interest rate is an eye-watering 4,214% APR. The company argues it charges "just" 1% a day, and that the APR figure is distorted and inappropriate because it assumes the money is borrowed for a whole year while Wonga loans last a maximum of 30 days. But many other payday lenders operate on the same basis and still manage to have lower APRs.

2. Wonga's income rose 269% to £45.8m in 2011. The highest paid director received £635,000. That's a lot of money generated by people paying just 1% a day.

3. Wonga says it lends responsibly, using thousands of bits of data available online to check an applicant is employed and can afford to repay the loan. But the Guardian and Observer has spoken to several borrowers, including some put forward by Wonga itself, who were either living on benefits or whose income has been halved. In response, Wonga's founder Errol Damelin admits they don't always get it right.

4. Other lenders – credit card companies, personal loan and mortgage lenders – may refuse to lend to someone if they see evidence they have borrowed from any payday lender, including Wonga. They regard this type of borrowing as a sign the applicant is struggling financially, and therefore has a high risk of not repaying. Mortgage lender GE Moneysays it will not lend to applicants who have taken out a payday loan in the past three months, even if they have paid it back on time and without problem.

5. The Office of Fair Trading told Wonga in May it must improve its debt collection practices, and threatened to fine the firm. The warning came after the lender sent letters in 2010 to borrowers who were struggling with repayments suggesting they might be guilty of fraud. In the letter Wonga said it would consider contacting the police if the customers did not act as Wonga requested.

6. Wonga tried to profit from the financial struggles suffered by cash-strapped students by targeting them with information on its website. The company took this down after the Guardian brought it to light, but not before the National Union of Students described the firm as "highly irresponsible" for carrying out what it called "predatory marketing".

7. Wonga boasts about the speed with which it can get money into your account, taking just 15 minutes from application to delivery. But some people who have suffered identity theft and loss of money from their current accounts are wondering whether the speed of its checks and the way loans are set up is to blame.

8. Wonga's marketing style suggests its business is about helping people make fun lifestyle choices ("You've just remembered your wedding anniversary with hours to spare … Don't worry, Wonga it!"). But the Advertising Standards Authority has taken some of Wonga's most cheerful adverts off the air, ruling that the "light-hearted presentation of the ad was likely to mislead about the nature and implications of the product".

9. Stella Creasy, Labour shadow home affairs minister, describes payday lenders as legal loan sharks and has produced a campaign pack available on her website. If you oppose Wonga's sponsorship of the Toon's shirt, you can also join the Red Card for Wonga campaign started by Northampton Town supporter Bob Ward.

10. First step, Wonga sponsorship on the shirt. Second step, the Wonga stadium … Do you really want to risk opening the door, even just a crack?

http://www.guardian.co.uk/money/2012/oct/09/newcastle-united-wonga-sponsorship-controversial

[indierich06]

God only knows what the annual rate is on these predatory loans....several thousand per cent in some cases...

Indeed, the annual rates are astronomical, but if you don't check that out before taking out a loan, surely you only have yourself to blame?

[Benji]

One of the big problems is that people take out these loans either through desperation or ease of availability. These are called payday loans for a reason - they should get you through to your next pay day at which time your pay cheque should cover what you've borrowed.

In the real world though, it's going to be people that knowingly or unknowingly will not be able to pay back on payday. Only then when the pay days go by does the interest rate really kick in.

[Alf Bentley]

Indeed, the annual rates are astronomical, but if you don't check that out before taking out a loan, surely you only have yourself to blame?

Not everyone is that savvy - they may just see the short-term interest figure ("1% per day? That's not much. No problem!") and/or may assume that they'll be able to pay it back quickly, but then find that they can't, for whatever reason. Also, some people just get desperate.

People need better warnings and protection. After all, everyone knows that heroin is addictive, don't they, yet plenty of people still fall into the trap? It would be a bit harsh to turn round to them and say, "you only have yourself to blame!"

[Father Ted]

One of my mates has had problems with these. It's unfair on him to say his debt on here but it's a 4-figure sum. He owes Money Shop £300 and I've heard there is a loophole where they won't take legal proceedings against anybody unless its over £1000, not sure how true that is.

They are complete bullshit, I'll never use them but many gullible people will.

[Benji]

One of my mates has had problems with these. It's unfair on him to say his debt on here but it's a 4-figure sum. He owes Money Shop £300 and I've heard there is a loophole where they won't take legal proceedings against anybody unless its over £1000, not sure how true that is.

They are complete bullshit, I'll never use them but many gullible people will.

Not sure about loopholes, but the companies will, contrary to popular belief, be very careful about debt reclaiming and legal proceedings. If they get too heavy handed with smaller amounts in particular, the OFT will come down on them and shut down the industry.

I don't even know whether a court would uphold their interest rates? Anything in a general commercial contract over 3 or 4% can be seen as an unlawful penalty... You don't exactly see Lloyds or HSBC jumping in with interest rates in the thousands (granted they lend larger sums). Imagine the companies will do anything and everything they can to stay out of court.

[pSinatra]

I used to work with a bloke who had a pay-day loan. Every Friday he would go in & pay off his loan, realise he is skint & take out another pay-day loan.........week in week out. He was a perfect customer. They pick on the vulnerable & once they have their claws in - they're not going to let go!!

Parasites!!

[Captain...]

In the grand scheme of things it is such a small amount of money that can lead you to crippling life destroying debt.

If you can pay it off on pay day then you should wait until pay day before you buy it, in most cases whatever it is you need to buy, if urgent, can be bought on credit with a deposit, for example your boiler breaks, or some such other one off payment. If you have run out of money for the month then borrowing more is not really going to resolve the issue because it will just happen next month even quicker.

What I would like to see is banks offering a similar service, they can see how much you earn every month, they know when you get paid, they can collect the money from your bank account as soon as you get paid, with a £10-20 admin fee, everyone is a winner, no crippling spiralling debts, access to small loans with no risk of them not being paid back, and a little extra for the bank.

[Rincewind]

I've used them one or twice to cash a cheque. To cash a cheque around £300 it cost over £50. The last time they said the cheque wasn't valid and could not accept it. This was a few months before the company I worked for went up the spout. The boss blamed the bank and said he was going to give them a bolloking. I doubt that he did. I have not had a credit card for a few years. It is so easy to go over the limit. You draw say a tenner and think I'll easily pay that off next month. Next month arrives and you find you have a bill with more than you expected so just pay a fiver off the interest. I have an overdraft which I was eating into after stopping work. The interest on that was not good. Sorted things out now and budgeting every day. Had help from family which put my balance in the black. Now got to last to July if I don't find work where I can take pension credits. Works out that I'll be close to my overdraft by then at my present expenditure rate.

I did apply for a credit card last year but was refused because I am not working. Sort of relieved though as it would have made things worse.

There are a lot of people use those loans though. They make it sound easy. All you have to do is show a bank statement and a wage slip. If your income is similar to your outcome they do not refuse.

[notnow john]

Think it was a play-on-words mate. Ie, why are people interested in them when the interest is so high. It's quite clever really

Thanks for explaining it to him.

[kingfox]

Really don't know why people bother with these.

The adverts for them are shit, especially Quick Quid.

[Parafox]

I'm sure you can build up a debt that is so unmanagable that it can be written off and you are clean as the day you were born.

No you can't. Bankruptcy will detroy any credit rating and affect bank accounts and no mortgage will be available for several years following.

I think you're referring to an IVA (individual voluntary agreement) where the IVA company take over the payment of the debts and take a monthly "instalment" from the debtor after arranging an agreement with the creditors to pay back a minimum percentage of the debt. (Likely to be the debt minus interest). If you own a house this may become part of the agreement and can be sold to clear the debt. They take into account the salaries of the debtors and work out a minimum amount to be repaid monthly. Usually they calculate an amount you need to live on and the remainder is what you have to pay.

This can take several years and in that time if you default, then the full debt becomes live again.

It's a way of avoiding bankruptcy whilst repaying most of the debt, but not all, and it means the creditors stop writing or contacting you to make payments.

[SystonFox]

Is it true that if you use a pay day loan irrelevant of ammount you'll be rejected a mortgage for the next 5 years.

A mate at work uses one regularly, its fair to say its crippled him. He is now depressed, sad, quiet, lonely and to make matters worse he gets phone calls at work (mobile and work phones) with reminders to pay. Non stop!

He went to a proper bank a few weeks back to get a £4k loan to pay off the payday loans, they rejected him cos hes already in the shit and as a result he went to bright house and bought a 40" smart TV to make himself feel better. £12 a week. £48 a month. 2 years = nearly £1,200 telly!

Vicious circle

[Saxondale]

As a rule of thumb, higher interest rates exist where there is a higher risk. It's a like a gamble - these lenders charge more but have a statistically lower chance of getting their money back from each customer. The sort of lending that they do is extremely high risk. In turn, the amount they pay for their money (because they will need funding, too) will be linked to their overall bad debt rate.

To give you all a bit of quantitative context, a company like Wonga's bad debt rate will be something like 10-20%. In other words, 10% of the money they lend out they won't see again. These sort of companies, after exhausting their own collecting process, will sell on the bad debt to a recovery company for approximately 10% of the value of the debt.

Their interest rates seem like, in fact are, a rip off - but they are set where they are for a reason.

Their overall return margin on the money lent, before their overheads, will be measured by a figure called RORWA (Return on Risk-Weighted Assets), and I would be surprised if their figure was much more than 3%. These sort of lenders do make big profits, but only but lending out vast amounts of money, the actual percentage return is relatively small.

Is it true that if you use a pay day loan irrelevant of ammount you'll be rejected a mortgage for the next 5 years.

Categorically not true.

[Rincewind]

It is hard to feel sorry for them when the ones they lend to have so much to pay back.

[notnow john]

As a rule of thumb, higher interest rates exist where there is a higher risk. It's a like a gamble - these lenders charge more but have a statistically lower chance of getting their money back from each customer. The sort of lending that they do is extremely high risk. In turn, the amount they pay for their money (because they will need funding, too) will be linked to their overall bad debt rate.

To give you all a bit of quantitative context, a company like Wonga's bad debt rate will be something like 10-20%. In other words, 10% of the money they lend out they won't see again. These sort of companies, after exhausting their own collecting process, will sell on the bad debt to a recovery company for approximately 10% of the value of the debt.

Their interest rates seem like, in fact are, a rip off - but they are set where they are for a reason.

Their overall return margin on the money lent, before their overheads, will be measured by a figure called RORWA (Return on Risk-Weighted Assets), and I would be surprised if their figure was much more than 3%. These sort of lenders do make big profits, but only but lending out vast amounts of money, the actual percentage return is relatively small.

Categorically not true.

The O.F.T. (office of fair trading) have opened formal investigations into Fifty payday loan companies.

A couple of years ago they were unheard of ,now the sector has exploded,wonder why ,if it's so risky!

[Rincewind]

There are more pawnbrokers too. Some of them act as money lenders as well.

[Saxondale]

The O.F.T. (office of fair trading) have opened formal investigations into Fifty payday loan companies.

A couple of years ago they were unheard of ,now the sector has exploded,wonder why ,if it's so risky!

Because there's a market for it, everybody's skint.