The Real Cost of Credit: What is the Bottom Line?

IN THE current economic climate, with many Britons finding it hard to make ends meet, it is saddening but not surprising to find that there are a growing number of lenders that are seeking to make huge amounts of money off the backs of some of the most vulnerable in society.

Take many payday loan companies, for example. They have been advertising heavily in the media recently with jolly animated characters and actors smiling happily at the ‘easy’ money that they have just received to tide them over to payday. However, if you pay less attention to the scenes of joy at a fistful of notes and more to the small print then the true cost of such loans become clear. A brief search on the net of three such loan companies turn up “Representative APRs” on their loans of 1,410%, 1737% and 4214%! It is not hard to imagine the kind of spiralling debt that people taking out such exorbitant loans could fall into.

Another sector of the lending industry that has come in for criticism from consumer groups is the pay weekly hire purchase sector. One well known high street chain that offers goods on weekly payment terms has been highlighted as making it difficult for customers to compare like-for-like the goods that they offer, (including a case where an identical TV could be had elsewhere for 50% less than the cash price quoted by this store and only after a consumer journalist had to repeatedly request the manufacturer’s standard model number was a comparison with other retailers possible). In addition to charging “Representative 29.9% APR” to its customers this chain has also received flack from consumer groups for selling poor-value for money warranties and insurance.

So what are the alternatives to the rapacious rates of interest charged by many of the lenders to people on low incomes? Credit unions, the financial co-operatives owned by their members, have been growing rapidly in recent times and there are currently over 400 in Britain with membership expected to top one million this year, (Source: Savings and loans on the increase The Press Association 4 April 2012). As they are owned by their members they focus more on their needs and are not motivated by a desire to suck every last penny out of people as many of the myriad of low-end loan companies that have sprung up recently seem intent on doing.

Of course the safest way to be is to adopt a traditional ‘save to spend’ approach and save up for things. We should always pause and ask ourselves how many of the “must have” things pushed on us by advertising are really worth the worry of saddling ourselves with debt!