It’s WAR. And Payday loan companies are the target.
It seems Ralph Miliband wasn’t the only one to fight for his country. Now Ed Miliband has declared war on Payday loan companies, vowing to tax them out of existence while simultaneously bigging up credit unions. Assuming he gets in in 2015 of course.
Payday lenders are no strangers to adverse political interest- Labour MP Stella Creasy has been a formidable adversary of theirs for years. Earlier this year even the Archbishop of Canterbury waded in, before blushing over the Church's indirect investment in Wonga shares. But this time, Ed’s serious, and he’s going to hit them where it hurts. In the bank balance.
Reports today say that the Labour leader would levy either a 1% balance sheet tax (i.e. 1% of assets, which would include outstanding loans, less provisions for bad debts) or an additional 10% profits tax. They would then use this money (an estimated £20m) to double the amount currently awarded by Government to fund local credit unions, bringing the total up to £26 million.
Both Ed and Stella are meeting payday loan “victims” today, and Ms Creasy will say that she is “determined to see a cap introduced in the UK so that we can see an end to this legal loan sharking and give consumers the protection they deserve.” David Cameron said he hadn’t ruled out a cap, but noted that a cap hadn’t necessarily worked in other countries.
Part of the reason politicians are so keen on credit unions is because, under Credit Union regulation, they can only charge a maximum of 2% compound interest per month, which gives an APR of just 26.8%, a fraction of the four- or five-figure rates charged by payday lenders.
But most people, if they have ever heard of a credit union, imagine something run in the back room of a pub, with pencilled pass books and calculators. Many of them are, but surely the cost savings for that quick fix loan are worth a bit of extra effort and low-tech? Typical prices for a £400 loan for one month would cost you £120 in interest charges from a typical payday lender- a credit union charges just £8 in interest. Even if you add on an £11 same day payment charge levied by some online credit unions, you still save over £100. And they aren’t all paper based- what’s the difference between this CUOK site and a shady payday lender other than the interest rate?
Of course, the main issue with credit unions is that they are, by definition, local organisations. The CUOK site above, although it is online, is still limited to people living or working in their areas of Central London. Although there are probably a few people who work in Central London. But even if you don’t, there will be a credit union to cover your area. You need to become a member, normally at a nominal £1 or £2 cost and you may be required to deposit money with them first. Other rules may vary between credit unions, but using CUOK as an example, you need to pay £2 to join and deposit £5 (which you can get back) and you need to be employed and earning at least £12,000 to use their ‘payday’ loan service.
Wonga is entirely unconcerned and insists it welcomes competition from credit unions, because it “favours consumer choice.”