Payday loans

Living off the smell of an oily rag is all about being frugal with one’s money. That means being sensible about borrowing.

Central government is currently reviewing consumer credit laws, and this has awakened media interest in the scandalous Payday Loan industry, which has grown exponentially in recent years.

Payday loans are short-term unsecured loans of small amounts that are intended to get the borrower though to the next payday. They generally have a maximum term of a month or two. According to the website of these lenders, the loans are typically used to pay for groceries, power bills, vehicle breakdowns, and the like. But the reality is there are probably a host of other reasons why desperate people end up at the doorstep of these usurious lenders.

The loans are usually for just a few hundred dollars. While every lender has different terms, they all have one thing in common – outrageously high interest rates with 500% per annum not unusual!

That means for every $1,000 these Payday lenders lend out, by the end of the first year they will receive back $6,000. If that $6,000 is then lent out at the start of year 2 they will end that year with $36,000, with $216,000 by the end of year 3, and with just under $1.3m by the end of year 4 – all from an original investment of just $1,000!

From what we can see there’s nothing illegal about what these lenders do. They don’t even lurk in the shadows as one might imagine but are quite upfront and open about their terms. For example, Payday Advance has this statement of their website:

“Our Annual Interest Rates range from 520% to 624%pa or approx. 1.42% to 1.70% per day. Implications of Non-payment – we encourage loans to be repaid in accordance with agreed dates, however in the event of a non-payment the following applies: Fees – a fee of $50 applies to each missed or failed payment, a fee of $10 for each reminder letter & a fee of $10 for each week you remain in default. Default Interest – applies to any overdue amount at 104% per annum. Collection practices – we will promptly contact you regarding any missed payments and we undertake to manage collection of our loans in accordance with legal requirements and industry standards. Credit Score implications – when/where credit scoring is used in NZ a repaid loan will most often positively influence your credit score. However when a missed payment, failed payment or unpaid loan occurs this is likely to negatively impact on your credit score. Renewal policy – renewals are not automatic and are available on loans (other than your first loan) where your past payment history is satisfactory to us and are subject to our discretion. A fee of $20 applies.”

Handy Cash publish this financial health warning: “This website only offers short term loans. Short term loans can be expensive and may not solve your money problems. There may be cheaper borrowing options and/or other assistance available to you. For example, if you are on Government benefits, ask if you can receive an advance from WINZ. To decide if this product is right for you, please review our website carefully.”

Cash Converters advised they have a daily rate of 1.315% (480% a year).

Many of the lenders say their loans are a way for borrowers to “take control of their finances”. Borrowing money at 500% interest rate is NOT taking control of your finances! It’s actually digging a bigger hole and creating financial poverty.

From what we can see the government’s review of consumer credit is mainly concerned about disclosure issues and will do nothing to alter the fact that Payday lenders can charge +500% interest rates to desperate individuals. Some may say let the free market work and if people want to pay 500% interest then so be it. But free market principles are based on people acting rationally, and there’s nothing rational about desperate people paying 500% on a loan to pay for groceries or to fuel an addiction.