Who said that the economy is in the doldrums? For some short term loans companies, it is the golden age as far as business fortunes is concerned. The poorer people become, the better off the instant cash loan business model appears to be.
Now the Provident Financial has muscled in on the short term loans companies’ territory with a business model that seems to be working just fine.
The trick appears to do the complete opposite of what went wrong with Northern Rock, back in the hey day of the easy credit era. They borrowed money from savers for the short term, but lent to people who couldn’t afford it, for the long term, and that’s how they went bankrupt.
Provident’s own Vanquis Bank gives a juicy 4.5% to savers who put their money in for several years, then lends it out to people short of a few quid as a short term loan. Of course the interest rates charged to Vanquis’ borrowers are a lot more than it gives its own “lenders” – up to 400%.
The policy seems to be working very well for the Provident, as it comes at a time when the traditional lenders – the banks and the credit card companies – are squeamish about lending very much at all. The Provident has picked up two and a half million customers in a very short time, many of them finding it difficult to get a loan anywhere else and, by all accounts, they really need the money.
The Provident obviously thinks it is a cut above the masses – i.e. the short term loans companies, a little like the latter treat the doorstep lenders – the infamous “loan sharks”. Take a look at the Vanquis Bank’s website. They are calling for a cap on instant cash loan interest rates, maybe because they are the only lenders out there who have interest rates bigger than the Vanquis!
The OFT, who despite the recently announced inquiry into the goings on in the instant cash loan sector, really do not want to get involved in setting a cap on interest rates. They simply want to rein in the worst excesses. However, they have criticised the Provident in the past for using excessively high interest rates and maybe they should be casting their net wider, and taking a look at the whole sub prime lender market rather than just concentrating on the short term loans companies.