Bernard Ginns: Winners and losers in the £2bn payday loans industry

According to Shelter, 600,000 people in Yorshire are facing a monthly battle to keep a roof over their heads. Some of these will be turning to payday lenders to help ends meet.

The housing and homelessness charity claimed this month that almost a million people nationally used a payday loan to help pay for their rent or mortgage.

Campbell Robb, chief executive, said: “It’s shocking to think that so many families in Yorkshire and the Humber will be starting the New Year with a huge weight hanging over them, trapped in a daily struggle to keep their home.

“Short-term credit may seem like a quick fix. However with the huge interest charges, things can quickly spiral out of control, leaving people with vast debts they simply can’t pay back.”

Which? reckons that a million households a month are taking out payday loans. Research for the consumer champion shows that nearly half of users have been unable to repay debt. A third of users take out credit that they knew they could not repay, according to Which?

Some 43 per cent of payday loan users said it is too easy to get credit, while 31 per cent said they had been hassled by debt collection agencies.

One in five said they had been hit with unexpected charges, while seven in ten expressed regret at taking out loans or other credit products.

Richard Lloyd, executive director, said: “Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by.

“That’s when they’re hit by excessive penalty charges and roll over fees.

“The Office of Fair Trading must do more to clamp down on irresponsible lending by introducing tighter rules for payday lenders. Better affordability assessments and clearer charges would be the first steps to clean up the industry and better protect consumers.”

Which? said the industry is booming and is estimated to be worth £2bn a year. It claims payday loans can be “seriously bad news” for borrowers who are struggling to afford food or pay their bills.

Which? highlights the plight of those who get caught in a debt trap of high penalty charges, rolled over payments and new loans.

What of the businesses operating in this space? Most people have heard about Wonga, which more than trebled its earnings in 2011.

Less people have heard of Wage Day Advance Limited, but the Skipton company bears closer examination.

The company’s financial performance in the year to December 31 2011 shows quite clearly who has been benefiting from the boom in payday loans – the shareholders of payday lenders.

The business provides short-term cash advance loans to individuals via the internet and over the phone. The loans are on an average term of 25 days and are repayable in full on the borrower’s next payday.

Turnover was £34.1m during the 12 months in question, up from £15.9m the same period in 2010. That’s an increase of 114 per cent, surely placing it among Yorkshire’s fastest growing businesses.

The company made a pre-tax profit of £16.3m during 2011, compared to £8.3m the previous year.

That’s a rise of 96 per cent. Wage Day had a profit margin of 47 per cent, making it one of Yorkshire’s most profitable businesses. The massive increase in profitability is due to the increase in the number of loans during the period.

In the annual report, the directors said they were confident that the rate of growth would continue in 2012.

During the year, the company paid a dividend of £222,250 to shareholders. After the year end, the directors proposed further dividends of £5.1m. Shareholders’ funds totalled £18.6m at the year end.

The owner and managing director of Wage Day is Dale Chapman. He did not respond to my calls for an interview last week, but he has previously spoken to the Yorkshire Post, telling us that his business is flourishing because of the restriction of mainstream credit to consumers through banks and other high street lenders.

He said payday loan providers have been “unfairly labelled as rip-off merchants” because they have to quote annual percentage rates when borrowers repay over a much shorter timeframe. The lender’s representative rate is 2,814.2 per cent APR, or 29.9 per cent per month.

I am not suggesting that Wage Day lends irresponsibly or hassles its borrowers. Indeed, the company provides employment for around 150 people and it paid £4.3m to the taxman in 2011.

But what about those margins?

Who is paying the price for those?