The recession in Britain is deepening and ordinary people are paying the price – with hundreds more losing their jobs every day. But not everyone is suffering. For some the economic crisis represents a huge opportunity to make a cheap buck from other people’s misery.
A myriad of moneylending shops have expanded across Britain’s high streets in recent months. They offer short-term “payday” loans, cheque cashing and pawnbroking for those who need to raise cash fast.
Business is booming as more people find it harder to make ends meet – and find it harder to get credit from ordinary banks. The Times newspaper found that the number of people taking out payday loans rose by 130 percent in the ten months to June last year.
This industry has little in the way of government regulation and is dominated by six big firms that carve up the market between them.
Some moneyshops charge up to £30 for every £100 they lend out over 31 days. Over a year this amounts to an interest rate of around 2,200 percent. QuickQuid is one such company offering payday loans. It openly admits that its interest rates can be as high as 9889.3 percent a year.
Payday loans are allegedly short-term debts that last until people get their next pay cheque. They are promoted as simple, fast and one-off solutions for those struggling to pay the bills.
In reality they suck people even deeper into debt. Thanks to the massive interest rates charged, people are often unable to repay the full amount of the loan within the month.
They defer their repayment and extend the period of the loan – incurring yet more interest as a result. People often end up taking out further loans to pay off the original one.
Research published last month by the price comparison website uSwitch found that someone taking out a £750 payday loan could end up paying back up to £1,687 if they defer their payments for five months. It describes these loans as “a fast track to a tangled web of debt”.
But despite the dangers, getting a loan from these moneyshops is easy. Many will hand over cash within 24 hours without carrying out any credit checks. They may not even check whether the borrower will be able to repay the debt.
A Channel 4 investigation found that some companies would lend money without obtaining any evidence of the borrower’s income through bank statements, wage slips and other documents.
Some lenders specify that borrowers must have a minimum income of £333 after tax every month – equivalent to around a third of the minimum wage. For people unable to get credit elsewhere, these loans can be very tempting.
The Money Shop will be a familiar sight to many people in Britain, having opened its 250th outlet in Marble Arch, central London, last October.
It is marketed with images of smiling people holding wads of cash. “At the Money Shop we believe that you should get your hands on cash when you need it,” its website declares. “So why wait?”
Companies who target the most vulnerable with loans are not immediately concerned with whether the borrower is able to manage the debt or not.
Their primary concern is making a profit – and lending cash to people who will defer repayment can be extremely lucrative as the interest rates compound.
But the extortionate interest rates are just one of the problems with these lenders. If borrowers don’t repay their loans straightaway, the debt is sold on to another company – which may have very different terms and conditions that the borrower is unaware of.
The Money Shop is owned by Dollar Financial, a publicly listed US company. Dollar Financial announced record revenues for the quarter ending September last year – £153 million, an increase of 17 percent on the same period in 2007.
Interest income from pawn loans in Britain rose to $2.9 million for the quarter, compared to $1.9 million for the same period in 2007. Dollar Financial estimates that this makes The Money Shop the third largest pawnbroker in Britain.
There is a stereotype that the people who use pawnbrokers and loan sharks are the very poorest, those living on the margins of society. But this image is increasingly inaccurate. The very concept of payday loans shows that they are targeted at those in regular work. As mainstream credit facilities dry up, more and more people find they have no other option but to turn to companies such as The Money Shop.
But while these businesses may be making money, in the long run they store up deeper problems for the capitalist system.
Consider the US “subprime” housing market. This involved lenders selling mortgages to low income families who were unable to pay them back.
Initially the lenders weren’t concerned about this as they could still make money by selling the debts on to someone else. This meant that the bad debts were spread widely across the system, rather than being confined to a few US specialist companies.
And when the debt bubble burst, it triggered a crisis for the financial system that has now spread into entire global economy. This has been absolutely devastating for ordinary people’s lives.
But as the crisis deepens, the moneyshops are looking to make profits by using the very same methods that triggered the crisis in the first place. And once again, ordinary working class people will pay the price – unless we start fighting back now.
Payday loans: Charges that grow daily
A BBC Radio 5 programme last October looked into payday loans after claims that lenders were aggressively targeting the vulnerable. It interviewed several people about their experiences with payday loans.
One woman from Liverpool took a period of sick leave from work – and saw her wages fall as a result. She took out a payday loan from a shop on her high street, but this simply increased her debt.
“I just needed £100 to go out and buy nappies and food for my family,” she said. “The payday loans company was saying, ‘Come in, bring your evidence of who you are and where you live, your cheque book and your debit card – and we can give you the money there and then’.”
She had to hand over postdated cheques for the company to cash when she was paid. But when that day came she did not have enough in her account to cover them.
After paying more money in bank charges than the amount she borrowed initially, she is now struggling to repay the debts.
Pawnbroking: ‘If our customers could use a Barclaycard they would. We are a last resort’
The number of pawnbrokers in Britain is growing by around 10 percent a year, according to the National Pawnbrokers Association.
The average interest rate for their loans is between 7 and 8 percent each month. But if people pawn items over a longer term this can increase to an interest rate of over 100 percent over a whole year.
Harvey & Thompson (H&T) is the biggest pawnbroker in Britain. It was acquired by Cash America in 1992, the second largest pawnbroker in the US.
This allowed H&T to increase the number of stores it has in Britain – it now has over 100.
In September 2004 H&T was bought by Rutland Partners, a private equity firm, for £49 million. Rutland then floated H&T on London’s Alternative Investment Market in 2006 and tripled its money, raking in £118 million.
H&T is now owned by a number of shareholders, including Morley Fund Management, an asset management arm of insurance giant Aviva.
Profits for the first half of last year at H&T were £17 million, up 33 percent on the same period in 2007. Profits from pawnbroking rose by over 35 percent, making up 89 percent of the group’s overall profits.
H&T also expects to announce record profits for the second half of last year.
“The reality is that if any of our customers could use a Barclaycard they would, because they’d pay less interest – so in that respect we are a last resort,” H&T commercial director Steve Fenerty admits.
The firm is also expanding into other moneylending activities, such as cheque cashing, payday loans and prepaid cards.
Profits from cheque cashing and payday loans were up by 15 percent in the first half of last year.
Prepaid cards: Over 13? You need plastic!
Prepaid cards are marketed as a simple alternative to opening a bank account that also help prevent people from getting into debt. They can be topped up with money and then used like a debit card to pay for goods or to withdraw money at a cash machine.
It is a rapidly growing industry. By autumn this year up to 10.8 million prepaid cards are expected to be issued in Britain. The industry is predicted to be worth £4 billion by next year.
The cards are another way for companies to rip money out of people. Richard Mason of advice website moneysupermarket.com refers to the use of prepaid cards as “pouring money into a bucket with a hole in it”.
Companies who issue the cards levy a variety of different charges to make money. These can include monthly “administration” costs, charges for taking out a card, charges for using the card to pay for goods, and charges for using the card to withdraw cash.
They can also set a charge for topping up, renewing, cancelling or replacing the cards. There may even be an “inactivity fee” – a charge incurred if the card is not used for a defined period of time.
The Money Shop offers the Titanium Cashplus card. It charges £9.95 for all new and replacement cards, 99p for cash machine withdrawals, £3 for withdrawals at a bank, £10 to cancel the card and up to £4.95 a month for maintenance.
It allows users to add additional cardholders to the account who can be as young as 13 years old.
The Financial Services Compensation Scheme is not applicable to the card. That means that if the company running the card scheme goes bust “your funds may become valueless and unusable and as a result you may lose your money”.
There are plenty of other ways to profit from prepaid cards apart from charges. Card operators earn interest on the combined balances of all the cards they issue.
A merchant fee is levied on retailers by banks for the cost of processing a transaction, and the card issuer will also take a small share of this. And the remaining balances on cards that expire may be kept by the card issuers.
Some companies market their prepaid cards at children. There is also a marked rise in the number of migrant workers taking up the cards. These “unbanked” workers are another a key target market who are told that prepaid cards are a convenient way of sending money abroad.
Repossessions: Leaseback robberies
Home repossessions in Britain are expected to soar by 67 percent this year to 75,000, according to the Council of Mortgage Lenders. Once again, predatory companies are waiting in the wings to offer a “solution” for those threatened with homelessness.
Companies have emerged offering “sale and leaseback” schemes. These allow people to sell their homes to the company but remain living there by leasing it back.
The schemes have been criticised for offering tenants little in the way of security and allowing companies to buy properties at knockdown prices without any independent valuation.
They are not regulated by the Financial Services Authority, giving people no way to complain about them or to seek compensation if they are ripped off.
Adam Sampson, chief executive of Shelter, said, “The actions of some companies offering ‘sale and leaseback’ schemes amounts to daylight robbery, leaving growing numbers of people financially ruined and homeless.
“The government must urgently introduce regulation to stamp out this unscrupulous practice, which is cashing in on people’s financial problems and deepening their misery.”
So far Gordon Brown has shown little appetite for such legislation.