How short-term money fix can lead to long-term debt

If you are short on funds this Christmas, this advertising pitch from moneylender Provident might be right up your street. "Your cash could be delivered to your door within days," it promises, urging you to apply for a cash loan of between €100 and €500 online now. But while it might be easy to obtain, paying it back can be a lot more difficult.

Unlike in the UK, where so-called "payday" loans offered by the likes of Wonga, can charge an APR of as much as 5,000 per cent, moneylenders are licensed by the Central Bank in Ireland. It imposes a maximum lending rate and it hasn't allowed an increase since it started over-seeing the sector in 2003.

However, APRs of +100 per cent – and even + 200 per cent – still proliferate and, with credit unions tightening their lending practices, it is feared that moneylenders are increasingly stepping into the gap.

"Where at all possible, moneylenders have to be avoided," says Brendan Hennessy, a member of St Vincent de Paul's social justice and policy team, adding that the society has been "extremely concerned about the growth of moneylending over the last couple of years".

There are about 39 moneylenders (http://registers.centralbank.ie/Downloads Page.aspx) currently licensed to operate in Ireland, about 10 per cent of which are large national or international organisations, with the majority being small- to medium-sized firms, which operate on a more localised scale.

Last year, the Central Bank disclosed that some 360,000 people across the country were borrowing about €200 million, up from €113 million in 2010, from licensed moneylenders.

Of these, it is thought that about 100,000 are customers of UK operation Provident Personal Credit, which offers a quick and easy online service, with agents delivering to your door within the aforementioned “days”.

Last week Bernard Sheridan, director of consumer protection at the Central Bank issued a warning, urging "consumers to think twice before taking on further loans from moneylending firms, in addition to their existing loans".

“This could take consumers into a rolling cycle of high-cost borrowing and potential debt, especially given the high-cost nature of moneylender loans, when compared with loans from banks and credit unions,” he said.

However Michael Culloty, a spokesman with Mabs, argues that it is not always Christmas that is the problem, but the days and months that follow.

“People spend out of their normal income [for Christmas], but it is afterwards when the utility bills start to come in on the doorstep,” he says.

Indeed, Hennessy notes that the SVP typically holds back some of the goods raised during its Christmas appeal to assist people in January.

But what are the key points to be aware about moneylending?

It’s expensive

If you find yourself looking for a loan from a moneylender, it is likely that you will have exhausted all other potential sources of credit – family, friends, credit card, overdraft, credit union etc – so it may be less important to compare the cost of credit. It is also likely that you may already have outstanding debt.

Nonetheless it is important to realise just how expensive it is. As the example in Table 2 shows, borrowing €500 means you will have to find another €280 to repay the loan in full. If you had borrowed this at just 11 per cent from your local credit union, the borrowing cost would have been just €55. And Provident is not the lender with the highest rates operating in Ireland.

Thanks to a collection charge of 7 cents in the euro, Southside Finance can lend at a rate of up to 287 per cent a year, according to the Central Bank.

But, while money lending is undoubtedly expensive, it continues to fill a gap for a large cohort of people who have no access to credit.

“If you put more restrictions on legal moneylenders, you’d push more underground,” warns Culloty.

Nonetheless, Culloty says that what is really needed is the creation of something like a micro-lending loan facility, which would meet the needs of low-income families, pointing out that under insolvency arrangements, people are allowed to borrow up to €560 without contacting their creditors.

He urges people to contact their local Mabs office before taking out such a loan, or getting in touch with a charity like SVP if they find themselves in difficulty.

Collections

Unlike a typical loan, which you might expect to repay via a direct debit or in your local credit union office, about 40 per cent of repayments to moneylenders are typically made by an agent calling to your house.

Provident for example, has more than 500 self-employed agents working across Ireland, 70 per cent of whom it says are female. Agents earn commission based on the amount they collect each week – not on the outstanding amount of loans. This approach means that it is in the interest of agents “to make sure you only borrow what you can afford to pay back”. But of course, the more you borrow, the more money will be needed to be collected – and hence the greater the commission.

It is understood that in the UK, agents of Provident get to keep between 6-9.5 per cent of the money they collect, but it is unlikely to be a way to easy riches – at least not for the agent.

For example, the company is actively hiring across Ireland – in Ennis, Co Clare, it is looking for a sales and collections agent, promising weekly earnings of between €201-300 for 21-30 hours work. Provident Financial Group, on the other hand, booked pre-tax profit of £196.1 million (€247 million) in 2013, up by 10 per cent on the previous year.

The use of an agent brings a personal touch to the transaction and can put extra pressure on the borrower to repay – sometimes by just knocking on the door.

“Communities use moneylenders as a custom and the agent is often seen as a friend of the person,” says Hennessy, but adds: “They may be very empathetic, but ultimately the service they are selling is keeping households in poverty.”

Under the Central Bank’s rules for moneylenders, certain collection restrictions do apply; you are not allowed to collect money on a Sunday, after 9 in the evening or before 8 in the morning, for example, without the written consent of the customer.

Sometimes, moneylenders charge an extra fee for this service. Southside Finance in Dublin charges 7 cents in the euro as a collection charge, for example, while Marlboro Trust charges double this.

If you do find yourself looking for such a loan, remember to consider the collection charge in the overall context of the cost of the loan, which is displayed in the aforementioned Central Bank’s registers.

Repaying the loan

Should you fall behind on repayments, a licensed moneylender cannot charge you extra under the Central Bank’s rules. Indeed, 90 per cent of respondents to a survey from the Central Bank last year noted that they were treated fairly by their loan provider in such circumstances.

Other difficulties can arise, though, and people may look to take out another loan to keep up repayments, even though this practice is prohibited by the Central Bank.

Families can also get caught up in the cycle. “Within a household, one person takes out a loan, then another person does in order to help pay back the first one,” notes Culloty.

Repaying a loan early, thereby paying less interest, can also be problematic. Last week the Central Bank fined Provident €105,000 after its Donegal office was found to have policies which could prevent the early repayment of loans in some circumstances.

Culloty is also concerned that repaying such a debt can become a priority – ahead of putting food on the table. “They pay back a loan while depriving themselves of food and necessities,” he has found.

Hennessy agrees that such loans can be repaid at the expense of other essentials such as utilities.

“The person who comes to your door will be prioritised, as if you owe them money you will want to get rid of them,” says Hennessy.

It’s not just cash

While the function of some moneylenders is to make money on lending cash, others will give you credit to purchase goods in their stores. However while the overhead APRs may not seem as outrageous, opting for a credit plan, rather than paying for the goods outright, may put you considerably out of pocket, as well as limit your ability to shop around.

As well as giving out cash, Provident for example has also joined forces with One4All vouchers, a majority owned subsidiary of An Post, and you can borrow up to €2,000 in gift vouchers. Based on an APR of 152.3 per cent, if you purchased €500 in vouchers on credit over 25 weeks, it will cost you €625 to pay back. Some have queried the appropriateness of a state backed body facilitating such high interest rates.

UK online retailer Littlewoods is also approved by the Central Bank to offer consumers finance at an APR of up to 43.7 per cent over 172 weeks. it is currently offering finance at a rate of 39.9 per cent APR, and offers consumers the ability to pay either 10 per of their balance every month, or €10, whichever is greater.

It is an attractive way for retailers – if they get it right – to make an extra margin on the sale of their goods, and Littlewoods is not the only one doing it. Fellow UK retailers Simply Be and Oxendales are also licensed as moneylenders by the Central Bank, as is Sherwoods Digital, in Kilkenny. It has been authorised to offer finance at a maximum APR of 26.94 per cent.

Incentives, such as Littlewood’s offer of €10 off your first credit order, pull consumers in and, given that you often don’t have to clear your balance before making an additional purchase, can keep purchasers hooked on a line of easy – if not cheap – credit.

And while convenient, opting for credit quickly makes that “bargain” couch or Black Friday special buy coat, anything but cheap.

Indeed, a coat which is advertised at €200 will in fact cost you €251.06 if you choose to repay over 21 months. If you had opted to use your credit card to pay (APR 19 per cent) it would only have cost you an additional €26 in interest over 16 months, if you paid back the minimum each month. Buyer beware: From moneylending to log-book lending The Citizens Advice service in the UK in October issued a warning about high-cost "log-book loans", in which consumers hand over the log-book of their car in return for a loan, which is secured on their vehicle. Use of such loans has soared by 60 per cent in the UK since 2011, with almost 60,000 taken out last year.

Like moneylending, consumers are typically offered fast cash, with few credit checks. Unlike moneylending, however, it may be unregulated. The cost of lending is typically very high – as much as 400 per cent in the UK – and is offered even to cus- tomers with very bad credit ratings, as long as they are the legal owner of their car. The risk, of course, for the borrower is that they will end up repaying a substantial sum in interest before eventually losing their vehicle.

The practice is not just restricted to the UK, even though in Ireland the Central Bank says it is a criminal offence to operate as a moneylender without a licence.

Mabs spokesman Michael Culloty, has drawn the practice to the attention of the Central Bank, but notes that its use as a quick and easy way to borrow money is likely to increase. “The lack of credit for people with no access to mainstream credit means that these operators will increase,” he suggests.

Indeed in Ireland, a website, Mobile Money Ireland, has sprung up, offering log-book loans to Irish residents at an interest rate of up to 187.2 per cent APR. This means that a €500 loan will cost €650 to repay over 26 weeks. It says it will lend in just one day on vehicles which are less than eight years old. There are no contact details on the site and, according to the Central Bank, it is not regulated by it.

Logbook Loans NI, regulated by the Office of Fair Trading, offers loans throughout Northern Ireland. It promises to lend up to 70 per cent of the trade value of your vehicle . A loan of £700 will end up costing you £1,644 over 18 months, equating to an APR of a hefty 271 per cent.