Last resort lenders and money sense

Living a frugal lifestyle has a lot of advantages, including being a great way to take control of your finances, and avoid costly debt.

Unfortunately not all people are in control of their finances, which makes them vulnerable to lenders of last resort. Falling into that category, are what are known as ‘payday’ loans. These are short-term unsecured loans of small amounts intended to get the borrower through to the next payday. They generally have a maximum term of a month or two.

Every lender has different terms, but they all have one thing in common – outrageously high-interest rates – more than 300% per annum is not unusual!

Here are some interesting facts about the payday loan industry – as told to us by someone on the ‘inside’.

Their average short-term loan amount is around $300. The average repayment term is just less than one month, and the average interest and charges revenue earned in that month is $100. So if we assume the $300 is lent 12 times during the year, the lender will make about $1,000, which is a return of 333% on their money. From what we have seen there’s nothing illegal about what these lenders do. They don’t even lurk in the shadows as consumer protection laws require them to be upfront and open about the terms.

About a third of their income comes from administration fees, the rest from interest charged. Most of this lending (85%) is done online, and it’s not unusual for one lender to be operating under a number of brands each with their own website.

Our insider said they have two types of customers: Blue collar families needing to pay unexpected expenses such as large phone bills, power bills, medical costs, travel expenses, etc; and white collar, high income, big spending families, with no savings, and big debts.

While this all sounds innocuous enough, the simple reality is that the borrowers are desperate, and have not been able to source money from elsewhere because of a bad credit record, maxed out credit cards, and the like.

Many of the lenders say their loans are a way for borrowers to “take control of their finances”. But borrowing money at +300% interest rates is NOT taking control of your finances! It’s actually digging a bigger hole and creating financial poverty.

Living off the smell of an oily rag is how people can take control of their finances.

Here are some money lessons to keep in mind.

• Seek budgeting advice if your finances are chaotic.

• Always have a nest-egg of savings available to meet unexpected costs.

• Don’t get a bad credit record – it will reduce your chances of obtaining credit from conventional lenders.

• A reader from Oamaru writes, “When my hubby and I were on a tight budget, we came up with the idea that we would not spend over $29 without receiving the other person’s approval first. We usually gave permission when asked by the other, but it gave us time to think if we really needed the item before getting it…a sanity check. We saved a lot of money in this way.”

• Pay bills on time and if there is a discount for early repayment then take advantage of it. Don’t get behind on your power and telephone to avoid disconnection and re-connection charges.

• Make every dollar stretch as far as possible to extract its maximum value. Examples include buying a near new second hand vehicle instead of a new one, saving on vehicle running costs by buying a small car instead of a gas guzzler, buying an energy efficient appliance, buying house branded groceries instead of branded products, having lemon flavoured water available for the kids instead of buying fizzy drinks, taking a cut lunch to work instead of spending up large on donuts at a lunch bar.

• Repay debt as quickly as you can, and repay as much as you can. Here are some ways to get on the debt repayments accelerator:

• Use windfall gains to make lump sum repayments (e.g. an inheritance, the sale of a second vehicle, an unused boat or caravan, etc).

• Have a coin tin. If you are collecting coins at a rate of $20 a month, use this to increase the repayments.

• Hold an annual garage sale. Use the proceeds for a lump sum mortgage repayment.

• Take on a second job or a money-making venture and use all of the extra income for debt repayment – call it your “debt free job”.

• Negotiate a lower interest rate and use the interest savings to increase the capital repayments.