Thursday, July 28, 2011

Fair Finance for those on benefits? "Typical APR 52.94%"

"Employed or receiving Benefits - Isn't it about time you got a fair deal". The other weekend I received this "flyer" through my letter box.  Double click on the scans left and right to bring up details.

At first I thought that this was just another form of Moneyshop or Payday 1330% APR con job targeting the poor and vulnerable.

I then had a proper look at the leaflet and saw that a typical APR of 52%.   Is this a "fair" interest rate.  Especially if you existed on benefits or low wages? 

Fair Finance is a Social enterprise which has some pretty respectable partners and backers. Their aim is to put "loan sharks and predatory lenders" out of business. Which is very laudable. 

Of course 52% is far, far less than the legal loan extortionists charge never mind the illegal loan sharks.  Yet I see that a local credit union offers similar (I admit that a credit union has a different set up) loans at only 19.6% APR.  Under Fair Finance you would pay £624 back on a £500 loan over 12 months while the credit union will only charge £567?  A big difference if you are on benefits or low pay? Should we not be backing credit unions?


Gilberdyke said...

Well, East End Fair Finance is also a mutual "not for profit, ethical and socially responsible lending organisation". I'm not saying I disagee with you, but I can't help feeling that if you're going to come over all Esther Rantzen then you ought to at least contact them and offer a 'right to reply'...

John Going Gently said...

hello from another john Gray!
and from one who doent support labour!

John Gray said...

Hi Gilberdyke
I suppose that is the point of a blog I suppose. If someone wants to respond - they can.

Hi Again long lost Cousin John. Hopefully one day you will see the light :)

faisel said...

Hello John
If you'd given us a call or popped into the office in Dalston i'd have been happy to explain more about us, our rates and how we we're different to other lenders like credit unions.
1. We're a non profit mutual for the benefit of community (rather than members). This means that any surplus we make after the costs of running a business are used to reduce the interest rate or invest in growing the business
2. Unlike the vast majority of Credit Unions we lend to people who haven’t/can’t or don’t save because they're too poor or are borrowing at extortionate rates. Our loans are also unsecured.
3. Lending to people without a credit history or a history of savings means that we have to spend a lot time interviewing and educating clients on managing their finances, and often on how to use a bank account to avoid charges
4. Because of the above two issues we have a higher risk profile of clients and it takes us more time to make a decision, and so we have to charge a rate that covers this cost.
Its also true that many CUs don’t lend to our clients because they cant charge enough to cover the costs of doing so, and we have many clients who have CU accounts. In fact unlike most CUs nearly 100% of our clients are financially excluded and most have been using doorstep lenders and payday lenders
5. We don’t receive any public money - all of it is borrowed from banks at an interest rate or social investors who will pay back. This also means that our loans will be more expensive than a publicly or charitably funded lending organisation
6. The rate we charge is in enough to cover all these costs, and because we’ve borrowed the money commercially it means if we’re successful it is easy for us to borrow more and grow.
The difference between ourselves and credit unions is quite small for a typical - £1 a week, but its a difference that has allowed us to grow from one council estate in Stepney to now covering half of London over the last few years, helping about 6000 people a year.
But in addition we open current accounts and basic bank accounts for the unbanked in partnership with a range of banks and we upload people’s data on to Experian so they can have a credit rating. What this means is that we plug them into the financial system and they are able to access banking and other services that you and i take for granted if they wish.
We’ve recently managed to prove to the banks and others that our model is viable and sustainable and have secured enough funding to grow across London (all commercial and private sector funded with no public subsidy). This means that over the next 5 years we aim to help close to 50,000 financially excluded residents wherever they might be in London.
If you want to know more about our work, come by or give me a call
Founder & Managing Director

John Gray said...

Hi Faisel

Thank you for your comments but I'm afraid that I am not convinced.

Sorry, I have never paid over 50% APR on a loan and would rather encourage my constituents to get a loan via the Credit union rather than pay such a rate.

I will seek advice and look into this issue further.