A report from the Institute for Public Policy Research (IPPR) said the UK’s credit unions should be expanded as a major source of affordable ethical lending; and the expansion should be financed by a levy on the consumer credit industry. The report received wide support from religious leaders. Continue reading
Payday lenders are the current target of regulators. The cap being introduced in January will force nearly all of these firms out of business, claims the FCA. Continue reading
Everyone’s heard of Wonga; but how many people know where their nearest credit union is?
“Jumping the Shark”, a new report by the Institute for Public Policy Research (IPPR) says ministers should provide a capital injection to support the credit union sector.
Published today, the document calls for a £450 million levy on the UK’s £180 billion consumer credit industry (“That’s 0.25%: doesn’t sound too draconian” – Ed.) to create a new generation of not-for-profit affordable lenders based on credit unions, with enough capital to compete with the established payday lenders.
Archbishop of Canterbury Justin Welby previously said he wanted to “compete Wonga out of business”, saying that the credit union sector should be expanded to provide an ethical and affordable alternative. And now the Church of Scotland has come out with the same message. According to Kate Devlin writing in the Herald Scotland today, ‘the Kirk’ supports the IPPR’s call for an expansion financed by a windfall levy.
[Credit Unions are much more widespread in Scotland, where 1 in 20 Scots are members of a credit union. Almost all Scots are currently eligible to join a credit union.]
These not-for-profit lenders could be partnered with church parishes, said the Church of Scotland. Alternatively they could be hosted in Post Office branches.
Providing UK credit unions with £450m of capital could help them support over one and a half million loans. The “new generation of lenders” should charge a maximum of 3% interest a month, or 42.6% APR, the IPPR recommends. This would allow customers to pay just £3 to borrow £100 for one month. A similar loan with Wonga, whose APR is 5853%, currently costs more than £30.
The IPPR also says the expanded network of affordable lenders should cap the maximum loan at £250 (the average size of current payday loans), limit customers to one loan at a time and stop lenders “rolling over” loans.
Mat Lawrence, IPPR Research Fellow, said of the recent economic good news: “A return to rising living standards will reduce households’ reliance on debt, but it will not eliminate their need for it. The payday lending industry has grown in large part because of a gap in the credit market that mainstream banks are unwilling to fill.
“Regulation can reduce the harm done by payday lenders but it alone cannot ensure that the public interest is properly served in the provision of affordable credit.
“Britain needs an initial capital injection to expand the provision of affordable credit. We need a strategy for spreading capital, building the assets of communities, and engaging citizens in forms of local democratic finance in which power and control resides with them, rather than with government agencies or unaccountable financial institutions.”
WANT TO KNOW MORE?
To download a copy of “Jumping the Shark” – the report from the Institute for Public Policy Research (IPPR), click HERE:
For the article from The Herald Scotland, click HERE:
To find a credit union near you, click HERE.
In my last post I referred to an upcoming interview on BBC Radio 4’s “The World This Weekend” with Muhammad Yunus, the Bangladeshi economist and Nobel Laureate.
35 years ago he more or less invented microfinance (or microcredit or microloans, whatever you want to call the idea). The occasion: Yunus’ brainchild Grameen Bank (the name means “Village Bank”) was about to open its first UK branch, inGlasgow.
Since then I’ve heard the interview – several times, thanks to the BBC’s wonderful iPlayer – and I am just as much a fan of Yunus as I was.
Grameen Bank’s model
Grameen’s loans are for small amounts; they are short-term and unsecured; they tend to be to poorer, “non-creditworthy” people. In the early days especially, in many cases they were to self-employed women, to get loan sharks off their backs. However, some critics have said that Grameen also charged high interest rates; and two years ago some microfinance lenders (not Grameen) were shut down by the authorities in the Indian state of Andhra Pradesh.
So naturally I thought I needed to test my opinion. In the past I’ve been critical of the UK’s growing “Payday Loans” industry with its very high interest rates; many financial journalists have urged the Government to outlaw them, especially Simon Read in the Independent. So … was microfinance just a payday loan with the added credibility of a Nobel Laureate / economics professor? Was this just the acceptable face of payday loans?
In my view; it’s not the same thing at all. The interview, and what I’ve read since around the subject, has confirmed me in the view. Although Grameen has not existed in the UK up to now, we do have credit unions, which are comparable in many ways.
Soundbite time …
Here are some soundbites that give a flavour but I urge you to listen to the BBC piece in full.
Shaun Ley (Presenter, “The World This Weekend”): “A crisis has gripped capitalism … here’s Muhammad Yunus, one of the world’s leading economists.”
“Grameen encourages small entrepreneurialism”
Professor Pamela Gillies (Principal and Vice-Chancellor, Glasgow Caledonian University; and Prof. Yunus’s host here): “this reminds me of self-help groups I’ve seen in Dundee.”
Vox pop, asked about the possibility of bad debts: “if I owe money to several people including a credit union… I feel part of the credit union, so I’d pay them first.”
US author David Roodman: “the microfinance model appeals to both left and right, despite limited objective evidence that it transforms lives.”
Yunus: “If the microfinance industry grows too fast, you can get a bubble, as happened in Andhra Pradesh.”
Prof Gillies: “If this works in Glasgow it could work everywhere in the UK”
Shaun Ley: “Should we encourage people to take on debt?” Yunus: “We don’t encourage, but we say if you are stuck, we can help. Our loans are all for the purpose of income generation. Our aim is to facilitate.”
Ley: “What happened in the Indian state of Andhra Pradesh?” Yunus: “We have no intention of making money from microcredit. Others found this profit source attractive, got backers onboard through an IPO, and were aggressive in promoting loans. That was a derailment of the original idea. Making money out of poor people is not a new idea – that’s what loan sharks have been doing for years.”
Yunus (asked about the microfinance industry in general) “If I could concentrate on Grameen specifically; we are owned by our borrowers. Two thirds of the money we lend comes from our borrowers.”
In conclusion …
Yes, Prof. Yunus and Grameen Bank may well have come in for criticism. Anyone who challenges financial orthodoxies and massive vested interests for 35 years will attract opposition. But it’s fair to say that the West’s banking sector has not covered itself in glory recently. Thus anyone who tries to develop an alternative financial model, especially when they do it from what seems to me an altruistic motive, deserves respect and support.
I’ll certainly be following the progress of the UK’s first Grameen Bank branch with interest; but I’ll also be following other alternative finance sources that are already established in the UK, e.g. credit unions and peer-to-peer lenders such as Zopa.
Watch this space!
WANT TO KNOW MORE?
BBC interview with Muhammad Yunus; available only until Sunday 18 March 2012 at 12.59: http://www.bbc.co.uk/iplayer/console/b01d24ym (starts at 16 mins)
Grameen Bank: http://en.wikipedia.org/wiki/Grameen_Bank
Glasgow Caledonian University, Yunus visit: http://www.gcu.ac.uk/newsevents/news/article.php?id=40898&c=126
Daily Telegraph, Nick Stace, “Yunus resigns from Grameen Bank”: http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/8511461/Muhammad-Yunus-resigns-from-Grameen-Bank.html
The Independent, Simon Read, “Time to crack down on payday loans”: http://www.independent.co.uk/money/spend-save/simon-read-time-to-crack-down-on-payday-loans-7547420.html
A while ago I blogged about the new(ish) peer-to-peer lending websites, such as Zopa, the largest in the UK. I also said I’d be looking into the matter further.
So I decided to read what the established financial journalists (the people who are paid for their expertise) are saying.
I’ve looked at a few of them, following the principle of Lobachesvky, who famously said: (according to the legendary Tom Lehrer): “To steal from one source; that’s plagiarism. To steal from many: that’s research.”
Firstly, I’ve learned that Zopa stands for the “Zone Of Possible Agreement” and its aim is to cut out the middleman by putting lenders and borrowers directly in touch. The site acts as a facilitator and makes sure debts are repaid.
“Personal finance just got a whole lot friendlier”
In an earlier post on this subject I mentioned Maryrose Fison’s article with the above title (January 2011) in the Independent. See below for a link, as it’s still on their website. Here’s my inexpert précis of what some other writers have said.
Rosie Murray-West, Daily Telegraph
She says that “(new-style) Peer-to-peer lending websites and old-style credit unions have been major beneficiaries of public anger against the banks, seeing a huge level of growth in 2010.
“ …Zopa … allows ordinary people with savings to lend them out at an average rate of 8pc and has now lent a total of £110m. Its rising popularity has led to four new peer-to-peer lenders being created in 2010, and the industry is now working on becoming properly regulated and establishing a code of conduct.”
“Meanwhile credit unions, which are co-operative organisations offering affordable loans and accounts without bank charges, have also grown.
A spokesman for ABCUL, the credit union association, said the amount of savings in British credit unions had risen by 27% in the two years to March despite the fact that many British people were struggling to save in the current economic climate. The number of new members of credit unions rose by 18.4% in the same period.
“Mark Lyonette, ABCUL’s chief executive, said that Credit Unions continue to grow as more and more people seek a fair and affordable alternative to the high street banks. He added that if the Government made good on its interest in making credit unions accessible through the post office network, there was the potential for many more people to join them.”
Martin Lewis’s ‘Money-Saving Expert’ site; opinions on Zopa
The ‘MSE’ site was sceptical about Zopa at first. But now they are saying that under certain conditions, it makes sense. As of today, the site’s view is:
“… for those with a good credit score, there’s an alternative. Zopa is a unique internet marketplace which couples people who want to lend with those who want to borrow. On application it gives you a credit score, and if you get its top A*, A or B ranking, you can borrow.
Loan rates vary daily and are determined by the amount needed and length of borrowing. For A* or A grade credit scorers wanting cash over 36 or 60 months, it can beat some loan rates, particularly on smaller amounts; currently, 9.6% APR is available for loans of £4,000, for example.”
View of a Zopa customer
By way of a change from the financial journos, here’s a quote from an actual Zopa borrower. (5 July 2011)
“Just thought I would let you all see my finished kitchen :o) All tiled and just about back to normal now. Thank you all to those who have helped me pay for this, you have no idea how happy I am it’s finally been done! :0} xxxxxx”
Editor’s note (that’s me): there is a video on Zopa’s Facebook page too but I’m not able to reproduce that, because I haven’t done the training course to insert video.
For your guidance, their loans are apparently mostly for the purpose of home improvement (like the above), cars or debt consolidation.
Moneywise “Most Trusted” awards
… and finally, I must congratulate this peer-to-peer lender for having achieved an important award. According to Moneywise magazine, Zopa is the UK’s Most Trusted Personal Loans Provider 2011. This was for the second year running and was against a shortlist that also included First Direct, Nationwide, Tesco Bank, Sainsbury’s Bank and Natwest.
WANT TO KNOW MORE?
1. For Rosie Murray-West’s article from the Daily Telegraph: http://www.telegraph.co.uk/finance/personalfinance/savings/8214641/Savers-spurn-banks-for-Zopa-style-peer-to-peer-lenders.html
2. Peer-to-peer lending: how to choose the right site by Emma Simon. (also in the Telegraph)
3. For the article in The Independent by Maryrose Fison: http://www.independent.co.uk/money/spend-save/maryrose-fison-personal-finance-just-got-a-whole-lot-friendlier-2173935.html
4. For the Money Saving Expert site and newsletter signup: http://www.moneysavingexpert.com/
For a free sample of my book, “Back to the Black: how to become debt-free and stay that way”:
Kindle format: http://www.amazon.com/dp/B004PLMAQM
Other e-formats, including .pdf: http://www.smashwords.com/books/view/22886
You can follow me on Twitter: @michaelmac43, on Facebook: Michael James MacMahon, or on Linked In.
Earlier this year, during an interview on Heart FM, I was asked about payday loans: would I advise anyone who was especially cash-strapped (for example as a result of Christmas), to take out one of these loans? This is a tricky matter: anyone considering any such loan must have exhausted all other possibilities.
Payday loans, usually for sums up to £1,000 ($1,500), are known to carry very high interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid quickly, i.e. on payday, but if it’s rolled over then the problem starts. However, they are marketed as being instantly available, which of course is very attractive when things are tight.
So the attractions are:
• Instant availability, even if you have a poor credit record
• Lack of bureaucracy, with a simple application method
• The fact that it’s cash: a cheque is less useful if you have to pay it in to a bank account with a maxed-out overdraft, though of course cheque / cash converter shops have foreseen that problem.
• The fact that it’s local, with a collector who probably lives near you.
If there is no alternative, and if the sum borrowed is repaid at the next payday, then paying that interest (high rate but small sum) is better than having to default on the mortgage or a credit card bill.
The problem arises, of course, if the sum isn’t paid quickly. Then, of course, it will become more and more difficult to repay, because of that very high interest rate. I could publish a table showing how the sum owing would build up at those very high interest rates: but that would be very depressing for you and for me.
Should you do it?
In the radio interview I said that if anyone was in a situation where they saw no alternative solution, then they should take the loan, provided they immediately got help from one of the debt advice charities, for example the CAB (Citizens Advice), or CCCS (Consumer Credit Counselling Services), or National Debtline, or one of the many local “not-for-profit” debt advisory services, and put together a plan. Step one of that plan must be to repay the payday loan as a first priority.
I still stand by that advice.
Those interest rates, by the way
In order to check my facts after that interview, I found a website that lists the top 5 payday loan providers (the “top 5” ranking is by “rough estimate of lender’s approval rates”). I found the APRs of these lenders varied from over 990% to over 2300%. Eye-watering stuff, if you can’t repay quickly.
For extra info see the MoneySavingExpert website, for example this post:
http://www.moneysavingexpert.com/news/loans/2010/01/loan-sharks-leaving-victims-in-debt-all-year . That article talked about interest rates (APR) “up to 1500%”. As you can see above, I found some rates to be even higher.
Credit Unions: an alternative
Credit unions are an alternative and much cheaper source of short-term finance that people in this situation could look at: an alternative, in fact, to high-street lenders as well as to payday loans.
The local one here in Bristol, for example, is at http://www.bristolcreditunion.org/; they offer loans from £100 to £7,500 ($150 to $11,250). Their website says: “By law credit unions cannot charge any more than 2% per month on the reducing balance of a loan. This represents a maximum interest rate of 26.8% APR (Annual Percentage Rate), and that is the most you will ever pay on your loan.”
Worth checking out? 26.8% sounds better than those payday loans.
If you are in debt, and whether or not you are considering a payday loan, I always bang on about the need to get help as soon as possible. That should preferably come from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (that’s the Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the UK) or CCCS (Consumer Credit Counselling Service) or National Debtline. Then you need to formulate a plan with the help of that advice, and inform the creditors that is what you’re doing and ask them to freeze interest while that’s happening.
Many creditors will agree to that, but if you don’t ask you don’t get. Many debtors spend too long in denial and they don’t communicate with their creditors, which makes the situation worse. I know: I was one of those.
In fact my book’s subtitle could even be “Learn from my mistakes”.
Christmas is coming!
At the top of this post I mentioned Christmas. This is a good time to say that one way of avoiding payday loans is to cut down spending. Don’t cut down on the fun but do cut down on the presents!
As I say in my book: “Christmas is not an emergency.” (it comes every year)
“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook at Smashwords to sample (view or download the first 20% free) or to buy at only $3.99. Go to: http://www.smashwords.com/books/view/22886
Yesterday I was working with Jenny Layton, who’s giving me fantastic help with the text-editing of Edition 2 of “Back To The Black”, i.e. the complete content as an e-book. I am still hoping we’ll get the file uploaded by the end of February.
After that the next project will be a podcast and an audio version of the complete book.
This morning I did another interview with Heart FM, this time with Rob Mayor. This came about because Heart felt that the issue of “Payday Loans” needed exploring further. We talked about why people are tempted by such loans, the benefits on which they are sold, and the well-known disadvantages of the astronomical interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid really quickly, i.e. on payday, but if it’s rolled over then the problem starts.
We talked about credit unions as an alternative to high-street lenders or to payday loans.
I also stressed the need to take advice, preferably from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the
All this is the kind of advice that most people have read lots of times; however, my hope is that when the complete book is published, people will view the advice in a different light because of what I say about where I went wrong. In fact the book’s subtitle could even be “Learn from my mistakes”.