Does Which? know the meaning of \”irresponsible\”?

Consumer rights group Which? has called for a clampdown on \”irresponsible lending\” as it emerged that almost 40pc of payday loans are taken out to buy basics such as food.

Borrowing money to buy food doesn\’t sound like being irresponsible to me really.

One of the most responsible things you could borrow money for I would have thought. Feeding the kiddies……

The credit, which often comes at interest rates as high as 4,214pc, is used to pay regular household bills by 32pc of those who take them out, and rent by a fifth. Almost a third of those surveyed said that they had been hassled by debt collection agencies in the last year after using the lenders.

Which? executive director, Richard Lloyd, said: \”It\’s shocking that half of all people taking out payday loans have been unable to pay the money back

Puts that interest rate into perspective really, that default rate.

Say you\’re lending out a total of £100. For a week. 50% default rate. Thus you need a 100% interest rate just to end up with the same amount of money at the end of the week as you started it with.

Convert to APR and you\’re over 5,000 percent already.

And do note, this isn\’t a problem that will be solved by lending through a credit union, cutting out the money thieving capitalist bastards. It\’s just inherent in that default rate and the way that APR is calculated.

8 comments on “Does Which? know the meaning of \”irresponsible\”?

  1. Isn’t it perhaps the case that the default rate is so high because the interest rates are so high? So if they reduced those rates, perhaps more people would be able to meet the repayments.

    Which comes first, the chicken or the egg..

  2. Or, you can have policies that reduce prices towards free market levels, reducing the need for consumption borrowing. Like, reducing consumption taxes. And radically reducing State involvement in land controls, allowing for housing supply to rise, and thus reducing housing costs (a major budget item for the less well off).

    And then, stop pumping money into the economy to drive inflation. We’ve known since Von Mises that monetary inflation benefits the few at the top end (and State connected) at the expense of those less well off and less State-connected. Let’s have an end to it.

    The less the need for borrowing of any kind (personal consumption, business investment, etc), the better for the economy (not for people in the lending industry of course, but for everyone else). There is always a need for lending and borrowing in a dynamic economy. But we should see the expansion of borrowing not as a sign of health, but of economic dysfunction.

    As a rule of thumb, prices of staples should fall over time due to productivity gains, allowing increasing consumption of previously unaffordable items. By everyone. The fact that these staples (housing, energy, food) are inflating tells us that something is very wrong.

  3. The clue is in the name. ANNUAL percentage rate. Great for loans whose period is many years. Not so great with short term loans of weeks and months.

    Articles that just say 4000% when the really mean 4000% APR just confuse matters. The actual percentage is way way lower, and when you look at actual amounts it’s not so scary.

    I remember when I was taking my Woodworking NVQs that some of the exam tests covered percentages. I wondered why such a simple thing had to be tested on people who had left school. Maybe journalists need to go on a similar course (less the wood bit).

    As for irresponsible, taking out equity from your home to go on holiday is irresponsible.

  4. Cutting off payday lending may reduce bankruptcies and other bad financial outcomes.

    http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/the_real_costs_of_credit_access

    But Payday lending can be positive when used by the responsible when they do not have access to any other form of credit – so when disasters strike, households can hold on to their homes if they access to payday lenders:

    http://www2.lse.ac.uk/fmg/documents/events/seminars/capitalMarket/2007/957_A_Morse.pdf

    Note that Morse still finds payday lending is bad for mortgage defaults, but when combined with disasters, it is positive.

  5. Even for the smallest loans credit unions typically have an interest rate around 25% APR. Someone borrowing £100 and paying it back over 4 weeks would only pay about £1.20 in interest.

    The default rate in credit unions is significantly lower, usually around 15%-25%, and the Eligible Loan Deductions Scheme reduces the risk of lending to people on benefits:

    http://www.dwp.gov.uk/other-specialists/eligible-loan-deductions/

    Even so, credit unions generally make a loss on all loans under £500 or so, subsidising them with the profit from larger loans.

    The reason that credit unions can’t replace payday loans is that their loan process is slower, less convenient, and more selective. You can’t apply online and get a loan paid into your account in minutes. You won’t be allowed a loan for something “trivial”, like a TV or a holiday, if you have significant existing debts.

    But if someone does meet their requirements for borrowing, a credit union loan is usually a pretty fantastic deal compared with the alternatives.

  6. It’s a real shame that most people in a position to have a loud voice when telling us what to do are the pricks who, at school couldn’t do any science, were crap at art and rubbish at English. They ALWAYS sick noted PE.

    Since RE was unfashionable, their career path was politics (if their family were in the club), journalism (if their family were in the club), science (if they got a Third at Greewwich) or Which?.

    Is this what real Marxists do?;

    “I’m sorry darling, your ribs are going to pierce your skin because that was Daddy’s watch and we’re not going to pawn it just for food!” .

    “We’ll gladly do it for your fees at Westminster in a few years time, so if you could possibly hang on until then…

  7. “The fact that these staples (housing, energy, food) are inflating tells us that something is very wrong.” – housing in desirable areas would be expected to rise in real terms as other needs become cheaper ( people can afford a greater sacrifice ), not sure that food and energy are becoming more expensive in real real terms (hours worked to buy given amount).

    Electricity is cheaper as proportion of wages than it was 30 years ago (afaik), food deffo.

    Could even be true for a barrel of oil – wages have gone up a lot over recent decades, oil’s only gone from 20 to 90 a barrel.

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