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Loans are less dangerous when they're small, short-term and have to be repaid, yes; but the rate is still high (you'd have to repay GBP 461 for a GBP 400 two-we

Loans are less dangerous when they're small, short-term and have to be repaid, yes; but the rate is still high (you'd have to repay GBP 461 for a GBP 400 two-week loan, to grab some numbers from the article.)

yummyfajitas 16y ago
They also have a 10% default rate. So just to break even, they need to charge 440 GDP.
- bryanlarsen 16y ago
  They don't lose the full amount on all defaults. Many will pay back eventually, even paying some penalties, providing higher profits. As the article mentions, it's the defaults where traditional providers make most of their money. Defaulted loans are almost always worth something. They can be sold to collection agencies, who typically buy them at around 10 cents to the dollar.
  - yummyfajitas 16y ago
    Well, they certainly aren't making money by lending $100, waiting for a default and then selling the loan for $10. But you are right, the article does make the claim that defaults are profitable. I missed that on the first read. So I guess maybe most defaults are just late payments or something? Do you have any more info on this?
    - JoachimSchipper 16y ago
      If someone defaults, you keep charging 4000% interest, and three months later "cut a deal" to have them only repay half of what they now owe, you've still received 125% of the amount they borrowed. I'm not sure about the exact numbers, but you can see how even defaults could be profitable.
- gadders 16y ago
  I have a friend that is a research analyst in a bank that covers "Other Financials" (i.e. companies like Wonga that aren't traditional banks). He mentioned a company (similar-ish to Wonga) that does Home Credit - i.e. people going round door to door in poor areas lending money and collecting on a weekly basis. These companies typically charge 183% APR. The Joseph Rowntree Foundation (a UK charity) did some research to see if they could provide the same service on a non-profit basis. They found that with a government subsidy of £18m, they would still only be able to get the interest rate down to 123%. This is due to the large number of defaults and other costs. http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-help-people-poverty http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-... I thought this was interesting - what seems like an outrageous rate really doesn't always translate into outrageous profits.

yummyfajitas 16y ago

They also have a 10% default rate. So just to break even, they need to charge 440 GDP.

bryanlarsen 16y ago
They don't lose the full amount on all defaults. Many will pay back eventually, even paying some penalties, providing higher profits. As the article mentions, it's the defaults where traditional providers make most of their money. Defaulted loans are almost always worth something. They can be sold to collection agencies, who typically buy them at around 10 cents to the dollar.
- yummyfajitas 16y ago
  Well, they certainly aren't making money by lending $100, waiting for a default and then selling the loan for $10. But you are right, the article does make the claim that defaults are profitable. I missed that on the first read. So I guess maybe most defaults are just late payments or something? Do you have any more info on this?
  - JoachimSchipper 16y ago
    If someone defaults, you keep charging 4000% interest, and three months later "cut a deal" to have them only repay half of what they now owe, you've still received 125% of the amount they borrowed. I'm not sure about the exact numbers, but you can see how even defaults could be profitable.
gadders 16y ago
I have a friend that is a research analyst in a bank that covers "Other Financials" (i.e. companies like Wonga that aren't traditional banks). He mentioned a company (similar-ish to Wonga) that does Home Credit - i.e. people going round door to door in poor areas lending money and collecting on a weekly basis. These companies typically charge 183% APR. The Joseph Rowntree Foundation (a UK charity) did some research to see if they could provide the same service on a non-profit basis. They found that with a government subsidy of £18m, they would still only be able to get the interest rate down to 123%. This is due to the large number of defaults and other costs. http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-help-people-poverty http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-... I thought this was interesting - what seems like an outrageous rate really doesn't always translate into outrageous profits.