The Bureau: Predatory Loans
Revealed: The £1 Billion High Cost Lending Industry
Britain’s top dozen high cost lenders – some charging interest rates of more than 4,000% – made almost £1bn in the last 12 months, the Bureau of Investigative Journalism can reveal. The figure is more than four times greater than the turnover of the entire industry assessed just three years ago. Half of the biggest high-risk loan companies in the Bureau’s research also posted profit margins of more than 30%.
This massive growth in an industry that is largely made up of controversial payday loan companies, has taken place despite Britain suffering a double-dip recession, and against the background of falling wages and a squeeze on more mainstream borrowing. The Bureau’s investigation into these lenders analysed the accounts of companies that offer debt to customers with low credit ratings, and charge high interest rates in the process.
Many of the companies in the research offer payday loans, a term used to refer to a short-term, high-cost loan, regardless of whether the payment is linked to a borrower’s payday. Some of these companies charge interest that is equivalent to 4,000% annually, on loans intended to last a few weeks or months. Other companies provide loans, some more long-term, with interest rates above 50%, considerably higher than conventional mortgages, overdraft facilities and even credit card companies.
Related story: Get the data – The high cost lending companies
The disclosures come as the Office of Fair Trading (OFT) is due to decide whether it will refer the payday loans industry to the Competition Commission for a market investigation into alleged restrictive business practices. The OFT is also waiting for responses to a series of letters sent to the leading firms questioning how they are run. The government watchdog’s review of the industry has already led to three companies having their licenses to issue loans revoked and another three placed under formal investigation.
Earlier this year prime minister David Cameron rejected calls for a cap on the interest rates the firms can charge borrowers. He told the House of Commons: ‘The most important thing to do… is to welcome what the Office of Fair Trading is doing, which is putting those companies on notice… without an effective regulated sector, there are far more dangers from loan sharks.’
Now research by the Bureau shows how the payday loans firms and other high-risk lenders, have enjoyed a period of rapid expansion funded by loans from high street banks and huge investment from foreign firms, mostly in the US where, unlike in Britain, payday loans are heavily regulated.
Related story: The money pouring into a boom for consumer loans
The Bureau’s analysis of the industry’ top 50 firms reveals that:
• Leading firms are boasting profit margins over 30%.
• At least seven leading firms saw their revenues treble in the last year.
• Six firms made operating profits of more than £10m.
• One loan company director earned a salary of £1.6m and four more were paid between £200,000 and £800,000 a year.
• Shareholders in one firm received a £5.3m dividend.
• Small loan company bosses are becoming overnight millionaires, in one case transforming a former guesthouse owner into a gentleman farmer.
The total turnover of the firms we examined was £1.4bn compared to £242m in 2009, when the industry was analysed in detail by the government agency the National Consumer Council.
Leading company Wonga.com posted profits of more than £63m while three others made more than £30m operating profits: Instant Cash Loans, MEM Consumer Finance ltd and Amigo Loans.
Seven companies more than tripled their revenue in the past year: Wonga.com, Lending Stream, TxtLoan, CFO Lending, The Loan Store, First and Goal Ltd and SDM Corporation.
And six companies in the top ten made pre-tax profits of more than £10m and profit margins based on their operating profits of more than 30%. These include WageDayAdvance, which was bought by a US-based company in February and made £16.4m pretax profits on £34m turnover.
Labour MP Stella Creasy, who has campaigned to limit the interest that firms can charge, said: ’Recommendation after recommendation and review after review has uncovered a systematic failing in this industry, which continues to claim it can sort itself out. ‘Those struggling with the debts they are causing know otherwise – they desperately need the government to do the right thing and cap the total cost of credit that can be charged in the UK to give British consumers the protection that they deserve from these problems – and that others around the world enjoy.’
The huge expansion in the industry is demonstrated by the growth of medium-sized firm CFO Lending, which published its accounts at Companies House this week. The firm, which charges 4,414% APR interest on loans and is run by Essex property developer James Keeble, has seen its turnover increase from £790,000 in 2009 to £19.6m for the year ending August 2012 – a 24-fold increase. Other foreign-owned firms posted huge increases in turnover but made losses after paying fees due to their parent company.
One of the biggest firms in the market, Lending Stream, had an income of almost £33m, up from £10m a year earlier, but made a loss of £3.6m after paying more than £36m in administrative expenses. According to its accounts, its only employees are two foreign-based directors, but it faced huge costs, including paying £5.3m in royalties to its US parent Global Analytics Inc, based in California.
Payday loans have come under heavy attack by consumer groups including the Citizens Advice Bureau. Such groups draw on research into the industry showing the difficulty many people have repaying their loans.
Research by R3, the insolvency practitioner, shows that more than 5m adults were considering taking out a payday loan in the first six months of this year. It also revealed that millions of people – 13% of the population – prioritised paying back the loans over buying food, clothes or paying their heating bills.
Consumer research group, Which? also revealed that a third of payday loans were simply taken out to pay off another payday loan.
The growth in the industry has rewarded investors and directors well. Many of the chief executives of the companies analysed by the Bureau are earning six-figure salaries. The highest paid director at Wonga.com earned £1.6m in 2010, according to company accounts.
Dale Chapman and his father, founders of Wage Day Advance, received a share of a dividend of £5.3m according to a note in the accounts, as well as a pay-out after selling the company to US-owned Speedy Cash Holdings in February. Mr Chapman’s father, Paul bought a farm in Harrogate, west Yorkshire in the run-up to the sale.
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