Defending Provident Financial

As no one else seems to be doing it, I shall.

Defending lending at 500pc APR is like defending the legalisation of heroin
Despite delivering a 3.5pc rise in profits, Tuesday\’s results from Provident Financial failed to impress either the market or children\’s charity Barnardo\’s. It is not often that a company manages to alienate traders and charity bosses on the same day.

Especially as I not only defend the legalisation of heroin, I vociferously argue in favour of it. And for much the same reason: the illegality causes more problems than legality does/would.

If people could not borrow legally from such as Provident Financial (Cattles of Hull and S&U….the three having 50% or so of the market between them) then they\’ll borrow from those less respectable. You know, the type that take kneecaps as collateral.

I\’ve also been sent an email telling me the following about the Barnardo\’s research:

The Barnardos study is based on 16 families of which 3 had no loans at all and 1 couldn’t quantify their only (catalogue) debt.  Therefore the results are based on 12 families pre-selected on the basis that they were unemployed, living in poverty and were users of Barnardos services.

Not exactly a, umm, wide ranging survey there.

It\’s also not particularly evident that Provident are making excess profits: £50 million odd on a loan book of a £ billion or so. There\’s also a stonking loan loss provision already accounted for:

Provident\’s bad debt charge stood at 131.6 million pounds in the first half, equivalent to 31.2 percent of revenues, against 121.2 million pounds, or 30.4 percent of revenues, a year earlier.

It\’s that, plus the cost structure of doorstep collections in small amounts, that leads to those high APRs and yet not the ginormous profits that some might think are being made.

Finally, some people in the US have tried to break this cycle. Let\’s do the lending as a non-profit, let\’s not try and make fortunes out of the skins of the poor. The result?

But alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney*, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.

And at Provident Financial?

Crook said Provident had several thousand customers on that 23-week loan, but a more typical rate for a new customer taking out a one-year loan was 254% APR.

No, that\’s not exactly the same as the terms of the loans are different. But it does show that it\’s more to do with the structure of the cost base, the issuing of small loans and their collection, than it is to do with gouging and profiteering.

* GoodMoney is part of Goodwill Industries, similar in many ways of the Oxfam shops, recycling donations of clothes and goods through the shops to generate the cash to aid the poor and homeless on a non-profit basis.


2 thoughts on “Defending Provident Financial”

  1. It’s a no-brainer, isn’t it? If GoodMoney need to charge that much just to cover their costs (the primary one of which would probably be default) – which they obviously do, being a non-profit – then a similar charge by a commercial firm is clearly not unreasonable.

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