Fair Finance

Fair Finance got turned down by a couple of British banks when it went looking for finance for expansion:

Fair Finance on Tuesday secured £1m in funding from two of France\’s largest banks after receiving little interest from UK banks in its business, which involves lending at rates far below those normally on offer to poorer borrowers.

Barclays also declined to support Fair Finance. Barclays and RBS\’s decisions come despite both of them providing some of the company\’s first funding.

Royal Bank of Scotland, which has received tens of billions of pounds in state support, declined to provide a loan to Fair Finance, although it has provided support to similar organisations.

The tone of the article is that those British banks are very naughty indeed for not supporting such a wonderful adventure.

No, of course I don\’t know why they were turned down. But I\’ll guess anyway.

Representative Example for a Fair Personal Loan at Fair Finance

  • £750  Loan over 18 months
  • Monthly payments 53.31
  • Admin fee £37.50 (5% if loan is above £500)
  • Total Interest payable £220.32
  • Fixed Interest Rate 39%
  • Total Repayment £1007.82 Representative APR 48.72%
  • They\’re not going to make money at those rates. Yes, of course they\’re a not for profit, so they\’re not trying to profit: but they must make enough to actually pay back the money they borrow from the banks for their expansion. And I don\’t think those rates are high enough. My evidence is twofold.

    1) There are a number of sub-prime lending companies out there and all of them charge much more than this. Those competing companies do not have hugely above average returns to capital so their vastly higher charges aren\’t purely to do with being bastard profit grabbers. There\’s something about the costs in the business model, perhaps it\’s the collection costs, perhaps it\’s the default rates, but something which means that costs, even without profit, are going to be higher than this.

    2) When Goodwill in the US tried to run a not for profit payday loan service they found that they hasd to charge a 250% APR….that\’s when admin fees etc were included. This isn\’t directly comparable as this is a larger amount for longer, but it is indicative.

    The thing is, lending small amounts of money to people is simply very expensive indeed. And I don\’t think that even near 50% APR is a high enough fee to cover all of the costs.

    4 comments on “Fair Finance

    1. Credit unions charge a far lower rate of interest, typically 1% a month in the UK and have a very low default rate. If the banks really were interested in helping the low paid and the poor get loans they could deposit a few millions in credit unions so as to help make more loans.

    2. There is a world of difference between payaday loans and 18 month loan finance. The average life of a payday loan is probably less than 15 days (I assume that they are taken out towards the end of a working month). Given the costs of setting up the loan, approving the credit etc, an APR of over 100% is not surprising, but when those costs are amortised over 18 months, the rate will be considerably lower.

    3. Dear God! Are people’s memories that short? Lending to people whose ability to repay their debts was inversely proportional to their likely appeal to bleeding heart socialists and other phuquewhits was the very cause of the last banking crisis.

      Now these morons want to do it all again? With other people’s money?

      Someone please put a bullet in their collective brains before they do any real damage.

    4. Tim

      I have just come across your blog post about Fair Finance. As one of those involved in developing the business plan for the company I can assure you that it is possible to deliver loans at that price (roughly 50% APR) and earn sufficient income to repay our bank loans (with interest); and make a modest profit to reinvest in the business.

      We have six years of data on which our busines expansion plan is based and have confidence that our model will work. We have a rather different cost structure to the other sub-prime credit lenders, many of whom have loan officers who visit the borrowers’ homes to conduct their business; or who have a much higher default rate than we do.

      So while your general point is correct (making small loans is a relatively expensive business) your specific claim that 50% is too low is very likely to be proved incorrect.

      I also think that some price competition in this product should be welcome news for customers. The market is currently dominated by a small number of large players; and price transparency is less than it could be.

      Regards
      Mark Hannam
      Chair, Fair Finance

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