David Chaston reviews the effective cost of credit, being interest plus standard fees, of taking out a payday loan

Payday loans are a growing sector of the personal loan market.

They offer short term cash loans, and as the name suggests, to tide you over from now until your next pay day.

You can see ads for these types of loans everywhere, more so online.

They feature 'convenience' and the ability to get cash quickly for an immediate need.

They are a kind of impulse loan to support impulse buying.

However, they have attracted a lot of critical comment, especially overseas. There is a regulatory move in the US to ban such lending.

However, they seem a fast growing sector in New Zealand.

A key attraction is the profit that can be made. And profit flows from the sky-high cost of credit. But even more, profit flows from attracting vulnerable borrowers who on some occasions may not be able to meet the loan terms, and then get hit with default fees. Those fees are a significant source of revenue for some lenders in this category.

Because the advertising is usually all about convenience and hardly ever about the cost, for many borrowers that cost is rarely considered in context. And no-one thinks they are a bad credit risk, so the potential for additional fees is considered even less.

And with 'online' processes usually via mobile channels, the convenience factor gets very attractive, especially when combined with impulse online shopping.

In this table we have set out what each lender says you must repay for borrowing $500. (We targeted 30 days but not every lender offers that.) Then we calculated the effective annual interest rate for entering into that deal. This is different to the interest rate the lender discloses because we bundle up that interest rate with any set-up loan fees into an effective rate. But we haven't included any fees if you default; this analysis assumes the borrower meets all payments on time.

making one repayment (except as noted) Borrow Repay in (days) % daily % pa
in random order ... $ $ # effective effective
Ferratum $500 $748 30 1.352% 493.4%
Save My Bacon $500 $828 30 1.696% 618.9%
Need Cash Today $500 $640 28 (4 wp) 1.458% 532.1%
Moola $500 $640 28 (4 wp) 1.458% 532.1%
Zebra Loans $500 $835 30 1.724% 629.3%
Payday Advance $500 $932 30 2.097% 765.6%
Payday Loan $500 $932 30 2.097% 765.6%
Can'twait $500 $731 30 1.274% 465.0%
Cash Relief $500 $748 30 1.352% 493.4%
Smart Cash $500 $691 30 1.084% 395.8%
Just Cash $500 $748 30 1.352% 493.4%
Little Loan Shop $500 $748 30 1.352% 493.4%
Seed Cash - 3 monthly pymts $500 $950 91 (3 mp) 1.128% 411.8%
Cash Burst - 2 monthly pymts $500 $1189 61 (2 mp) 2.029% 740.6%
Real Finance $500 $665 30 0.956% 348.9%
Cash till Payday $500 $647 30 1.700% 620.5%
Money Shop $500        
Easy Financing $500        
Instant Cash Online $500 $637 30 0.812% 296.3%

(This table is a work in progress. If you have new companies to add, corrections to make, of updates, please contact us.)
The data in this table is our estimate based on what we can see or calculate from each lenders website. It is subject to revision.

These are startling results. If you use payday loans to take advantage of an online 'deal' the chances are you will spend much more in total than the 'deal' saved you.

Even the lowest rates in this table are far, far higher than for more traditional personal loans which can run as high as 40% pa.

There is the point that the companies make that to make an unsecured small-value short term loan is a costly and risky business. Without volume, these businesses aren't always as profitable as the interest rate suggest. But with volume they are, which is why aggressive marketing is an integral strategy.

However, there are alternatives:

Firstly, save to make the purchase. That will avoid any interest and fees, and making the cost of the item or service excessive.

Or, secondly, borrow from a community finance organisation. BNZ backs this one. (They don't make impulse cash loans, but they do lend from $1,000 to $5,000 over terms of up to three years. And the interest rate is 7% - well, actually 6.99%.)

If you don't have access to community finance, a standard personal loan might be an option. Here are some providers and the rates they charge. (Fees apply here too, and they can also raise the effective cost of credit.)

Remember, 'friendly' loan companies are always associated with unfriendly collection agencies. Best to avoid getting caught up with any of that.

We are not aware of any information about the size of this segment of the finance industry. If you know, or know the loan book size of any of the companies listed above, we would welcome the information. We are not aware of any regulation of this sector other than the Commerce Commission's brief to administer the CCCFA and the Fair Trading law.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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13 Comments

Sadly, these loan sharks flourish at the mature stage of a credit cycle. One by one they'll disappear when their pond gets drained.

Is 30 days realistic though? I'm assuming these people get paid weekly or fortnightly, so wouldn't it be the case these loans function as cash advance, and get paid back fully within 7 days?

What is wrong with us ?

We need legislation to protect the folk who are poor and often financially illiterate from taking loans from predatory lenders

The English first introduced laws to do this 350 years ago through the Usury Act of 1660 .

Many countries limit the rate of interest allowed , and even cap the admin fees as a % of the loan .

We base our laws on English law , so why on earth don't we have a Usury Act ?

And , we need reckless lending provisions as part of the legislation , whereby if you lend to someone who is likely to be unable to pay , or you fail to properly ascertain their ability to pay, you have no recourse to the courts to recover the debt

We used to, until they were swept away as part of the deregulation of the credit markets back in the 1980s.

The UK is far worse. APRs over 4000% and one person who paid an effective 16.7 million percent.

https://www.theguardian.com/money/2013/mar/16/payday-lender

There used to be a cap but apparently this was anti-business and Big Brother nanny state meddling etc etc. These companies are exploiting the desperate.

CCCFA is meant to provide compulsory info and protection but seems not. Further the ComCom obsession with interest free loans means saving and paying cash is penalised

Poor people - the gift that keeps on giving......

We don't seem to mind the poor spending up large on Lotto & Bingo and Pokies - all very addictive !

Totally shameless the way we encourage - even advertise these so called games / outlets. All justified in that the funds " go back to the community " - Reality is that the little that's left goes back - mostly to finance the well off's little ventures as the poor / illiterate don't have the ability to apply for these grants.

It's not a perfect world and we need to assist the vulnerable in our community by not making it easy for them to make bad decisions.

Singapore accepts people will gamble - but no advertising - state owned and when you walk into Marina Sands there are two entry streams - Foreigners - All welcome - no charge. Singapore passport holders pay S $ 100 on entry which lasts 24 hours.

All well aligned with recent Nobel winners nudge theory.

Joe Bennett, IIRC, yonks ago, characterised Lotto as:

"a self-imposed tax on the poor and stupid"....

Taxpayer...subsidised...as per......usual...if in a rental......situation......too...Join ...the dots.....otherwise....they....could....remortgage ....the ....home......at ...less...cost.....than.....a....Saver.....can...also....lend...their...hard...earned.....cash....on....100s of ......Percent....as opposed.....to...less....than ...5%.....how....dumb.......are ...they........Savers.....I....mean.

Then there are the door to door trucks , offering fancy goods, no deposit and interest free, just 2 or 3 times the normal retail. Probably not seen in most posters neighbourhoods.

It's crazy that they can lend at these rates, but what happens when Labour cap interest rates? Those borrowers are going to have to go somewhere and if companies like Moola aren't there, then won't they just use an unlicenced, black market lender?