Taking me to task over credit unions, Wonga and all the rest. It\’s worth quoting at length here:
I’ve seen a report that Goodwill (think charity shops) tried this in the US and found that APR was well over 130% without even charging interest, let alone trying to make a profit. So I wish the CoE all the luck in trying to compete in this payday loans market. But I do think that they’re not going to get very far. Simply because the costs of lending small sums for short time periods are inherently high.
He forgets one or two things. Firstly credit unions already lend at smaller sums than payday lenders. He’s right to say focusing on APRs are misleading, but in pounds and pence while a payday lender can charge around £25-35 per loan of £100 over 28 days, a credit union will charge about a pound.
Secondly financial institutions often cross-subsidise from more profitable bits of their operation to ensure loss-making activity can stay. Banks do it to fund “free” current accounts. This is why there was the need to make credit unions more than just lenders, attracting middle class savers back in the early nineties to make it easier to lend to low income families.
Though Timmy neglects to mention that more work on attracting more money can make the CoE’s plans on credit unions workable, his main crime was in not reminding us how necessary this intervention is. Even if credit unions do not make profit from lending to low income people or state subsidy is called upon (such as the DWP fund of £38m), this is vital to save the public purse in the long run.
If additional resources and support from outside isn’t given to credit unions, in the form of funding, shop-fronts, equipment, and advertising, then many consumers will have to rely on high cost credit from payday lenders. To this end personal debt profiles will rise, less money will be circulated on the high streets, more of it will line the pockets of fringe bank bigwigs, consumers will be less able to shield themselves from unseen financial shocks and the whole debt cycle starts again. That, Tim, is just not sensible.
Umm, Carl. Changing who pays the heavy expense of lending small sums for short terms doesn\’t change the fact that it is a heavy expense. It\’s still a very costly thing to do whether it is cross subsidised from other parts of the business (banks do this because they make large profits off the float on those \”free\” current accounts. That presumably wouldn\’t be there if we\’re talking about banking for the poor who won\’t be leaving those sums in accounts to be used as a float), whether it\’s subsidised from the tax payments of everyone else or anything else you might want to try and think up. Where the money comes from doesn\’t change the fact that money needs to be there to cover those costs.
So, no, I\’m not confused in the slightest, nor committing any kind of crime. It simply is expensive to lend small sums for short periods of time. Because there is a discrete and fixed cost to lending any amount of money at all. Which, as a percentage, will be higher the smaller the sum of money. How that cost is covered doesn\’t change the fact that it has to be.