AS inflation bites, especially in energy costs, more people are going to be forced into borrowing. Much of the population lives from one payday to another; a quarter have less than £100 in savings. They are perfect prey for moneylenders.
The interest on payday loans can be enormous – more than 1,000 per cent AER (Annual Equivalent Rate). Credit cards charge much less, but can potentially cost even more in the long run.
The average amount borrowed on a payday loan is £260, but on a credit card it is £2,000 or more. The former generally runs for two or three weeks; the latter can take years to clear, especially if the borrower finds it necessary to pay back as little as possible.
Take my Visa card for example. The minimum monthly payment is two per cent of the outstanding balance, which is just above the interest rate of 1.85 per cent. If we start with a debt of £2,000 and pay off £40 (two per cent) – and carry on paying £40 every month even as the loan gets smaller – it will take nearly 12 years to get clear. By the time you get to the end you will have paid nearly twice as much in interest as the capital sum owed (you can do your own calculations here.)
That’s not just a theoretical problem – the amount outstanding on UK credit cards is more than £60billion.
Despite operating costs and consumer defaults, there’s big money in this business. The first metric we can analyse is the net profit margin, which is the ratio of profit a company earns to the total amount of revenue that is generated. Visa’s profit margin is 51.1 per cent in 2021, compared to Mastercard’s 46 per cent for 2021.
Surely there is scope for reducing interest rates on credit cards, or a program of debt forgiveness?
Moneylending is a physically gentler, but equally relentless form of slavery. In California, personal service contracts are limited to seven years at most, to prevent the shackling that, for example, Hollywood formerly used. Yet since 2005 it has not been possible for US citizens to escape the burden of student loans, even through bankruptcy, while tuition costs have more than doubled over the last 20 years.
As the banking industry grinds harder in a time of increasing personal financial distress, something has got to give.