The payday loan gamble

It was interesting to read the discussions about payday lenders and their interest rates in your recent columns online.

 

Noticeably most of this has focused on "borrowers as victims", which is common among politicians and consumer advocates, usually painting themselves as crusaders to get on the news.

 

Many of them use the obvious attention-getting headline of ridiculously high interest rates. This is skewing the numbers for a story. As we have seen in previous articles, the interest rates may not be the issue at all.

 

For example, if a borrower wants a loan of $1000 for a short term, like a month. If the annual interest rate is 20 per cent, that's $200 a year, which is less than $20 for the month.

Who would lend $1000 to a desperate person with a low credit rating for a $20 return?

 

The assumption is the money gets paid back. In many cases that doesn't happen. Working in retail for 35 years and helping many customers to arrange low-interest finance, I frequently came across people who have used payday lenders, and have always failed to secure them financing.The main reason is these are individuals with a cavalier attitude to borrowing and a history of not repaying debts, and lets face it, may not have any other options when it comes to finance.

 

A payday finance company lending $1000 is at risk of losing the entire $1000, so it's basically gambling for it, and it all comes down to the odds. Would you give a stranger $1,000 for 2 months, in exchange for $20. No you won't. If just one borrower out of five disappears without repaying, then the lender needs to charge the other four interest plus costs of $250 each just to break even. The large established finance houses work on loss rates of about 1 per cent, so they are actually the ones making the big money. Payday lenders exist, as you pointed out, to give the borrowers an alternative to borrowing from the underground. Regulation has already done away with dodgy collection practices.

 

From our perspective, it’s not desperation but desire that drives reckless borrowing.

What we most need to change is people's attitudes to borrowing.