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.