How I became a payday lender

After seeing my young friends turning to payday loans, I decided to do something about it and become a lender myself. Here's how I got on.

I've been lending money to friends and associates for more than six months, while faithfully recording the results.

I decided to conduct this exercise in 'friend lending' after hearing of a young friend's experience. Living for the past five years near a large university campus, I meet many young adults under financial pressure, notably students, recent graduates and low-waged workers.

One particular young man, who combines his studies with minimum-wage shift work, revealed to me last year that his personal budget was so stretched that he had reluctantly borrowed from a payday lender to make ends meet.

My young friend borrowed £50 from Wonga for 30 days. At the end of the month, he had to pay back £72.15 (his original advance of £50, plus £22.15 in fees and interest).

Even as an ex-banker and former mathematician, I was appalled by this high-rate lending. My young chum paid an effective rate of interest of 44.3% over one month. This works out at an annual percentage rate of 8,150% APR.

After this confession I vowed to keep my young friends free from the greedy grasp of payday lenders. Here's how I got on...

Friend lending

When deciding to lend my own spare cash to needy friends, I noted that my savings were earning a measly 2% a year before tax. I calculated that to lend £50 to someone for, say, four weeks would cost me a mere 7.7p in lost interest.

At this point, I decided on two things: first, my friend lending would all be interest-free and, second, to reduce my risk of loss, I would limit loans to a maximum of £100 per individual. Since deciding on this course of action last summer, I have lent to various young folk. Two interesting observations have since emerged from my friend lending.

1. All of my borrowers have been young males. Despite knowing many young women, not one has asked for my financial help, despite my offer of help being fairly well-advertised.

2. Nobody – not one single borrower – has repaid on time and on target. Every single person has delayed payments for one reason or another, with most pleading financial hardship.

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A tale of four borrowers

To show you what came about when I lent my money to locals, here are four case studies, each randomly chosen from my borrowing circle. 

Borrower #1

Borrower #1 was perhaps my favourite borrower. Having more than one job, he paid his initial instalment eight days ahead of schedule. Alas, later payments weren't so prompt, largely because his income is unpredictable, since he works under the dreaded zero-hours contracts. Nevertheless, I have offered to lend to #1 again, largely because he is genuine, honest and hard-working.

Borrower #2

In theory, #2 has a full-time job, but it is of the worst kind, being both minimum-wage and zero-hours. Being paid weekly, he finds it difficult to make his wage last from one payday to the next. Although every payment was late, #2 kept me informed at all times by calling me, contacting me via Facebook or seeing me face-to-face.

Again, despite his late payments, I would probably lend to #2 again.

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Borrower #3

Borrower #3 is the Wonga victim I described earlier. In an effort to stop him getting walloped by Wonga a second time, I stepped in, lending him £75.

Predictably, I didn't get the three proposed payments of £25 on time. Instead, they came in fitfully, with the loan taking seven weeks to repay. I have the greatest sympathy for #3, as he struggles to balance student expenses and studies with low-paid work. Nevertheless, I recently turned down #3 when he applied for a follow-up loan.

Borrower #4

Borrower #4 has been my worst client so far, to the point that he has affected my entire view of friend lending. Seeing #4 in desperate need, I withdrew and gave him £100 cash on the spot. He agreed to repay this over eight weeks: four weeks' grace and then four payments of £25.

After 12 weeks of patient waiting, I had yet to receive a single payment from #4. Instead, I endured various feeble excuses and missed meetings. On occasion, I would hear an excuse for non-payment, only to see #4 spending freely in town that very same evening. To date, I have had four payments of £20, with £20 of the loan still remaining after almost 16 weeks. In no uncertain terms, I have warned #4 not to come to me again.

Losing both loan and friend

As soon as someone owes you money, it is can be remarkable how their attitudes change. Some folk become sheepish or apologetic when they see you (usually prior to making excuses for delayed payment). In the worst cases, borrowers will disappear, or pretend you are virtually invisible when your paths do cross. Even with the best borrowers, collecting cash costs both time and effort.

What's more, I'm not sure that my exercise in friend lending has actually discouraged local acquaintances from using payday lenders. Despite my best efforts, the people I lent to remain the target audience for Wonga and other ridiculous-rate lenders.

When my current batch of loans has been repaid, I will close my friend-lending bank (for the immediate future, at least). At times, the results have been surprising and disheartening in equal measure.

Still, I live in hope that my lessons on budgeting and money management have had some positive impact on these low-waged lads. 

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