Research by R3, an association of professionals that work “with financially troubled individuals and businesses“, has shown that 3.5 million people are resorting to sky high interest payday loans. Simon Leadbetter, former marketing director for financial services companies, investigates.
Usury, the charging of interest on money lent, was outlawed in England by Christian churches until 1545 when Henry VIII signed into law ‘An Acte Agaynst Usurie‘. The rest, as they say, is history.
Borrowing money is not a bad thing. Countries that borrow money to invest in economy-boosting projects, such as infrastructure, will get their money back through tax receipts. Organisations can spread the cost of expensive capital investment to ease their cash flow and boost future sales.
Individuals can use borrowing to buy homes (a third of us have mortgages), improve our homes (a quarter of all loans) and buy cars (two fifths of all loans). Just like business and governments, we can ease ourselves through periods when there’s more going out of the household purse than coming in – like at Christmas.
Even the most affluent will borrow from time to time, or have children who might need to borrow. It may be better to save and only spend what you have but it’s not possible for all of the people to do this all of the time.
Loans are simple
Loans are simple, generally well-understood, well-regulated products. An organisation lends you money and charges you interest based on four key factors: how much you want to borrow, over how long, whether you have any security (a home or other asset) and how much they trust you to repay the debt.
The more you borrow the lower interest rate you tend to pay. The longer you borrow the lower your monthly payments will be, although you’ll end up paying more overall. If you have an asset that you’re willing to offer up as security you’ll pay less as the risk to the lender is less, but you risk losing the asset if you don’t repay the debt.
Where people often get annoyed is around the final factor, the question of trusting you to repay the debt, or in financial terms, your ‘risk’ or credit rating.
Your credit rating is created from a combination of personal and non-personal risk factors. A Lender will take into account your income and your current commitments to see what you have left each month.
They’ll look at your track record of repaying debts (for example county court judgements or missed payments on credit cards or loans).
While organisations have their own risk models they also use the pooled data of three credit reference agencies; Experian, Equifax and Callcredit, that all try to outdo each other on accurately predicting your credit worthiness.
The other thing a lender will consider is your similarity to other people they’ve lent money to. As with all financial products, past performance is no indication of future behaviour, so they’ll match you to someone else who shares your characteristics.
As a lender they will probably be borrowing the money themselves (gone are the days when most banks used their own deposits to lend, apart from Mutuals who still do this), which costs them roughly 1%. If they ascertain that you have 10% chance of not repaying them from your credit rating they charge you their costs plus the risk of 11%. Where interest rates start to get frightening for people is when the lender thinks you have a 20%, 30%, 40% or greater chance of not repaying. Your interest rate rises accordingly.
So far, so simple.
Obviously, this is spread out across tens of lenders and millions of borrowers. It is also heavily regulated and monitored by the FSA, recent payment protection issues notwithstanding.
Non-FSA regulated lenders are a cause for concern
Where there is cause for concern is in the unregulated space. Loan sharks have been with us since day one and there’s little that can been done about this illegal activity short of ever greater vigilance, prosecutions of lenders and better consumer awareness.
The recent innovation has been pay day loans companies which offer short term loans and have the veneer of respectability but can charge as much as 4200% annual percentage rate (APR), i.e. the total cost of borrowing including fees if you borrowed the money for a year what would you repay.
Let’s say that again – 4,200 percent.
Sarah Creasy MP (Lab) and Stephen Tomlinson MP (Con) have recently taken this up and tabled a motion in the Houses of Parliament to look at payday loan companies.
One provider, Wonga, says on its website, “We don’t charge anything like the large Representative APR” saying they only charge “1% per day”. The equivalent is an “annual rate of interest of 360% per year”.
They blame the law for making them show the less appealing 4200% interest rate. This is misleading as it ignores the effect of compound interest i.e. interest on interest owed. For example, if you borrow £100 for one month from one of these sites over 30 days, you have to repay £100 + £36.72 interest, or just under 37%, over one month. Wonga implies that 30 days at 1% per day would be £30 interest not £36.72.
If you borrow the same £100 over 55 days (the maximum allowed) then you pay £162.73. This is £62.72 interest, or just under 63%, over less than two months, not £55.
Worse still, if you borrow £100 for one day you pay £106.52 back or just over 6.5% interest. That’s the compounding effect of fees and interest being paid on fees and interest, which Representative APRs were designed to inform us about.
In response John Moorwood of Wonga said, “The Representative APR includes the fee and is also made clear on the website – we provide all the information we are legally required to provide and also a very transparent total cost of repayment.
“All the information can be found easily on the home page before anyone applies. The total cost is actually the information customers tell us they really value and it’s something you don’t find too often with traditional lenders”.
‘Caveat emptor’ then – let the buyer beware.
This is not to pick on Wonga, as there are many similar companies (Payday UK, QuikQuid, Payday Express, PayDay Financial, KwikCash, and UKPayDayToday). However, the author witnessed Wonga’s chief executive, Eroll Damelin, excitedly spelling out the investment opportunity this company represented and the incredible returns it could deliver to various private equity funds and venture capitalists in 2006. The promise seemed to be massive returns for investors from massive interest rates for borrowers.
These companies often only lend to those with historically better than average credit scores so the chance of most of their borrowers going bad is very small but they still have staggering interest rates, and profits. However, many turning to a payday loan are clearly in some financial distress.
A short term loan might just help you out but if it goes wrong at these levels of interest rate it would be nothing short of catastrophic. There’s lots of matey language and bleating on the sites about how these companies perform a valuable social function and they never charge the interest rate that they “legally required to provide”.
All have a small statement in their terms and conditions to the effect that, “if you don’t work with us and we can’t recover the money over a reasonable period, your account may be passed to an external partner”, i.e. a debt collector who will use all and any means necessary to recover the cash.
While that is true of all lenders, no high street lender would get away with charging 4,200% APR without an outcry in Parliament and from regulators.
In conversation with Blue & Green Tomorrow, Frances Coulson, R3 President said, “These payday loans tend to have high interest rates and often those who use this type of credit find themselves in a vicious debt cycle.
“It is a sign that a person is struggling to manage their money and we would advise these individuals to seek professional budgeting advice, or the correct form of debt relief to get their personal finances back on track.
“It is best to speak to a provider that offers a range of solutions. Payday lenders and DMP (Debt Management Plan) providers usually sell a particular product, which may not offer the best solution for an individual to repay their debts.
“Payday loan companies are regulated by the OFT and they must have a consumer credit license to operate. As far as we know, the OFT do not collect figures (at least they don’t publish them) in terms of how many loans are taken out per year, the value of these loans and the number rolled-over.
“The banks are regulated by the FSA – and their lending figures are well documented and published. We suggest that the OFT should collect figures on the payday loan sector and publish these figures.”
You can download R3’s full report here.
It really is time for the Government to act and regulate this new industry more rigorously and push them into the tender embrace of the FSA, or have we learnt nothing from the debt crisis we’re still wallowing in.
If you want to borrow from an ethical source such as a responsible bank or credit union then read our report on ethical borrowing. If they won’t lend to you then you probably shouldn’t borrow more.
You can seek advice urgently from a debt counsellor (the charity Consumer Credit Counselling Service, or industry backed National Debt Line can help) who can advise you on how to bring safely down your debt.
How Going Green Can Save A Company Money
What is going green?
Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.
The first step in going green
There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.
Making needed changes within the company
After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.
Reducing the common paper waste
Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.
Make money by spreading the word
Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.
5 Easy Things You Can Do to Make Your Home More Sustainable
Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.
1. Weather stripping
If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.
Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.
Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.
2. Programmable thermostats
Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.
Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!
3. Low-flow water hardware
With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.
Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.
Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.
4. Energy efficient light bulbs
An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.
New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.
5. Installing solar panels
Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.
Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.
From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!
These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.
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