I don’t imagine that there are many readers who need to take out a pay-day loan. That’s a good thing.
Pay-day loans, like so many financial products, sound just fine at first glance. You contact a firm such as Wonga or QuickQuid (slogan: Make Today Payday). They’ll give you “quick approval” for a loan up to £1,500 – apply before 2.30pm one day and you could have the money the same day, or so says the QuickQuid website.
Then you pay them back when you get your paycheque.
The problem? You don’t just pay back the money you borrowed. You pay a “finance charge” too. How much that is depends on the credit rating QuickQuid gives you.
If you are rated “good”, you’ll pay back an extra £12.50 for every £50 you borrow. That equates to an annual charge of 1,410.33%.
If you are “average”, the charge goes up to £14.75 and the effective rate to 2,222.46%. Yes, you did read that right. Wonga charges even more – a “typical APR” of 2,689%.
Wonga thinks this is just fine – it says it offers a short-term service with “unique flexibility and complete transparency” and, at least if you take out one of its loans, you’ll know exactly what you are going to end up paying for it.
I get this argument and I do actually think that transparency and flexibility justify a high interest rate. But a rate 50 times that on an expensive credit card? No. That’s the kind of rate charged by a company that either thinks its customers are numerically illiterate or knows they are desperate. It just isn’t fair.
Still, while most of us think that we wouldn’t ever find ourselves taking out this kind of loan, there’s a strong chance we already have. How?
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Simply by having an account with the Halifax or Bank of Scotland. It used to be that the typical overdraft rate on a Halifax current account was 19.5%. Now you get charged a set fee – a bit like QuickQuid’s financing fee.
It is £1 a day if your overdraft is under £2,500 and £2 a day if it is over that. Go over your authorised limit and you’ll pay £5 a day.
Look at those numbers again. Under certain circumstances, they mean that even an authorised Halifax overdraft is more expensive than a payday loan: go overdrawn by £10 and you’ll pay £1 (assuming it is authorised). That’s equivalent to an interest rate of more than 3,500%.
Obviously, the more you borrow, the lower the effective rate becomes. But even at high loan levels, it is still high (an overdraft of £3,000 over a year costs you £730).
Again, the transparency of all this is good. But, again, there is no reason for the charges to be so high: the only conceivable reason for it is thinking you can get away with it. And the only way you can get away with this stuff is if you assume the general public – your customers – are too stupid to notice or to care.
It’s an attitude that goes all the way up the financial industry.
Look at Goldman Sachs this week. After months of running a “we-deserve- every-penny” PR campaign, the investment bank announced that its 100 London partners would be capping their pay and bonuses at a mere £1m each – barely enough for a small yacht.
This is all because they want to be seen to be “exercising restraint”.
Feel more kindly towards them than you did two weeks ago? Me neither. Either they have earned and deserve the money and can make a good case for taking it, or they can’t. Most of us think they can’t and they must surely think us very dim indeed if they expect us to be distracted from the core issue by a few rich people being mildly less rich.
The core issue is that a small number of people at the top of banks and at executive level in other big companies are grossly overpaid on any measure.
This isn’t the kind of thing that rips us off as directly as a £5 a day overdraft fee, but it rips us off nonetheless.
It costs us as shareholders (the more we allow staff to be overpaid, the less we get in dividends). It also contributes to the rising levels of inequality in the UK: a report out from the National Equality Panel has just concluded that the current divide between rich and poor is greater than at any time since the second world war.
If there were to be a slogan for this decade, it would be nice if it were something along the lines of “making financial life fairer”.
This isn’t going to happen at the instigation of our financial institutions or by itself. But we can probably make a start on getting it going by reminding the financial world that we aren’t quite as dim as they think – closing down our overcharging current accounts, taking a stand against all unfair fees and, as shareholders and voters, against the very idea that an employee of any company is worth a paycheque of a million pounds plus a year.
• This article was first published in the Financial Times