Investments  

Taking a global view on payday loans

When we paid for everything in cash, our wallet set a limit to our spending sprees. Point-of-sale finance and fast loans now come with a huge price tag.

Credit cards reward cash bonuses for using the plastic to purchase everything from a banana to a TV. Shops offer their own store cards to buy anything on installment, even a pair of trousers. The biggest volume of point-of-sale financing loans are taken during the festive season. Some deals, however, bring remorse once the party is over.

Wonga has come to symbolise the tough type of indebtedness in our consumer society. Against all the fame for the rates in the thousands, the temptation of a “loan in minutes” is its strong selling point.

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Health warning

As payday loans usually end up being harmful to the borrower’s financial health, many suggested regulating their advertising by analogy with the tobacco industry, to make obligatory a warning similar to that on cigarette packs. The footnotes on Wonga’s or Quickquid’s websites have the standard text: “Warning: Late repayment can cause you serious money problems.” But this does not seem to make much impact. Payday lending in the UK is extreme.

An illustrative example would do a better job: if you borrow £600 to buy a smartphone, after one year you pay back £35,718, or maybe more, since the 5,853 per cent APR is representative only.

In the Netherlands, all credit advertising has to include the message: “Let Op! Geld lenen kost geld.” (“Borrowing money costs money.”)

At the other extreme of interest rates is Sharia law, which forbids charging interest because Muslims must not benefit from lending money. On this religious ground, Newcastle United’s Senegalese striker objected to wearing the team’s shirt with Wonga as the sponsor on it. The Islamic law, however, did not stop Turks incurring credit card debts way over their heads.

The Turkish faced high inflation in the 1980s and 1990s, so they turned early from cash to credit cards. Later, when foreign capital was flowing into emerging markets such as Turkey, local banks gave spending limits many times customers’ monthly paycheques, oblivious to the risk they might not pay them back. Nothing like the sub-prime mortgage crisis of the US in size, but Turkey is facing its own credit crunch.

The number of problem loans is still obscure, since many debtors have several credit cards, juggling cash flows and borrowing from new cards to make payments on old ones. By now, Turkey’s 76m-strong population owns 54m credit cards, ranking as the second largest user nation in Europe after the UK’s 56m.

But where does the usurious rate start?

More and more European countries are capping the APR. In the Netherlands, the limit follows a formula – the ordinary interest plus 12 per cent – currently, that is 15 per cent, and 14 per cent from next year.