Personal Credit

Personal credit, its sources and its costs are issues that are slowly rising in Britain’s political consciousness. Over the past five years, payday loan firms have boomed as consumers were (and continue to be) locked out of conventional loans from risk-averse banks. Many of our high streets are now riddled with colourful shop fronts which offer “cash within 15 minutes” or “quick unsecured loans”. It does not sound too painful, until you look beyond the surface. Interest rates typically range from 200% to 1,500% APR.

However consumers, if you think that this is painful then look at the latest development in short-term credit: internet loans. The leading competitor in this area is the infamous Wonga.com, which charges an eye watering 4,214% APR on its loans. If someone were to borrow £100 from Wonga for seven years, they would have to repay £13,000,000,000,000, equivalent to the entire national debt of the United States.

Who is paying that sort of interest rate? There are those that occasionally find that their month’s (shrinking) salary has not quite stretched as far as they intended. And then there are those who have come to rely on such loans on a monthly basis. These firms rely on convenience and glossing over the figures to retain custom. These firms emphasise that the loan can be issued almost immediately, and buy a lot of advertising space to repeat the point. Their customers, often with poor credit ratings, are aware that they might have no other option.

Wonga has been accused of actually encouraging dependency on its “service”, despite assuring the press that it takes social responsibility very seriously, and provides short-term loans to people who use it as a last resort. In January this year, Wonga withdrew an article encouraging students to take smaller student loans and borrow any shortfall from the website. The article did not say that while it charges 4,214%, the student loan rate was just 1.5% at the time.

Some are now beginning to fight back. A group of Labour Co-operative MPs are lobbying the government to introduce a package of reforms, including a universal cap on the interest rates that can be charged on loans. Another key plank of the reforms would be greater support for Credit Unions, such as providing their customers access to their accounts through the Post Office.

Credit Unions are a rapidly growing, but underused, part of the UK’s financial services sector. They are local co-operatives set up to take deposits from savers and provide low-interest loans to others within the community. Any profits are returned to savers in the form of a dividend. The model is proving to be a great success, with some credit unions providing current accounts to those who are rejected by the high street banks, and others even offering mortgages. Credit Unions are probably the largest threat to payday loan firms, especially now that some (such as CUOK!) are mimicking Wonga’s quick and easy loans model.

In light of this, and the talk of introducing better competition into the banking sector, is it not time the government works to ensure that every community has at least one Credit Union? The Royal Bank of Scotland’s [RBS] sale of 300 branches to Santander (required by the European Union competition rules) was cancelled last earlier this month. As RBS is 83% owned by the taxpayer, it would seem sensible to arrange the transfer of these branches either to local, or a new national, Credit Union.

If the likes of Quick Quid and Wonga can exploit sections of the public due to a lack of competition, why do we not see what happens when their customers have a low-interest alternative? Four figure interest rates can and should be a thing of the past.

BY: Jack Darrant