The credit crunch has made subprime lending part of our vocabulary. We, in this instance, are those with secure jobs and good credit ratings, who prior to the crisis had little or no problems accessing credit from banks at low cost. And if our credit cards were finally maxed out, there were always sub-prime lenders happy to help out.
Cattles Plc is one of them, or better known under the name of Welcome Finance. It provides minimum loans of £750, targeting a lower-middle income group that often has access to credit, but wants a little more to finance that extra holiday or similar. By the way – these are gross generalisations. Companies such as Cattles are often the lender of the last resort when catastrophes happen, e.g. that flood damage your insurance won’t cover or that crashed car that needs urgent repairing.
Anyway, Cattles is in deep trouble now, with many of its clients not repaying their loans because of the economic crisis, and, as a consequence its share price plunging. In addition, Cattles relied on whole-sale finance to cover its capital requirements. This means that it borrowed money from mainstream banks such as HSBC, RBS or Barclays, and then used that to give it to its clients, making a tidy profit in the process: say, it lent at 6% from a bank, and then charged interest rates of ca 150-300% to its clients. Do the maths yourself (oh, and the banks obviously earn the 6% – thus making money by lending to a company that serves those people banks deem to be too risky to lend to… some contradiction….but that’s another blog…). Now that the banks don’t lend, Cattles has run out of cash and can’t lend anymore either. It has already stopped accepting new clients, and it has just suspended three senior staff for apparently embellishing numbers of expected bad debt . This is reflected in the share prices, as the little picture below shows:
Note the other, upper line in the graph? That’s Provident Financial Plc, the leader in the sub-prime lending market. As you can see, they are doing just fine, thank you very much. Why? Because their clients, as well as those of many of the other sub-prime lenders, are dependent on this credit, because their incomes do not cover their basic costs of life. Clients are mostly on the very low end of the income ladder, and are unlikely to have a credit history of such quality that would incentivise banks to give them an overdraft – if they have a bank account at all. For most, taking out a loan is not a choice, but a necessity – to pay for new clothes, or get a new mattress, until that next paycheck comes in. It’s a complicated issue, but rest assured, people taking out a loan with a door-step lender (as they are also known) do not do that to pay for plasma screen TVs or similar. It is to pay for the basic necessities in life. For the privilege of providing food and clothing for their children and themselves, they pay a steep price – for example, 365% APR for a loan of £50 over 31 weeks. This means that for borrowing £50, clients pay £77.50. Seems not a lot to you and me in total terms, but if you are on a very low income of, say, £70 a week, you quickly can get squeezed.
And, the sky is the limit in regards to APRs – there are no caps in the UK, meaning that some lenders charge up to 1000% on loans. And that is legal. If you play around with the loan comparison website , you can see for yourself (again, the reason as to why the UK does not have an interest rate ceiling deserves a whole report on its own – watch this space…).
So, the Provident and other companies serving this end of the market are pretty crisis-proof. As long as incomes and benefit payments are as low as they are, people will have to continue to take out credit, unless they want to starve. There are alternative lenders, such as Community Development Finance Institutions and Credit Unions. They are cheaper, transparent, and often provide a springboard out of the debt trap through personal advice and support. But they don’t yet have sufficient scale to provide this service to all those who are dependent on credit to make ends meet. Hence, there will be no shortage of clients for door-step lenders, and it is possible, as unemployment rises, that more and more people will be forced to borrow for basic expenditure. But hang on, didn’t excessive lending get us here in the first place? Hmmmmm…What interesting time we are living in….