Payday loan lenders: The issue of Business Morality

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Payday lenders operate legally in the United Kingdom. However, Justin Welby, the Archbishop of the Anglican church, last week made a statement that did not accuse these lenders of operating illegally but accused them of acting immorally. He criticised the payday lenders for preying on the most vulnerable people in society through high interest rates on cash loans. He vowed that his church was going to set up credit unions to compete with payday lenders and drive them out of business. This statement raises the issue about the extent of morality in business.

Payday lenders such as Wonga and Quick Quid are accused of not applying the principles of morality when offering cash loans to borrowers but only tend to consider their own financial gains from such transactions. The principles of morality are associated with the distinction between good and bad or right and wrong. However, this criticism may not be justified on the ground that the primary objective of running a business is to make financial gains and not to distinguish between morality and immorality. Any business that is set up without the aim of making profits is considered to be a charity and often supported or funded by taxpayers, profitable businesses or governments. Payday lenders do not claim to be non-profitable businesses and cannot be treated as such.

The major act of immorality for which payday lenders are accused involves the charging of high interest rate on cash loans being offered to customers. A typical annual percentage rate (APR) on a payday loan can range from 1413% to 5,853%. The annual percentage rate (APR) is the annual cost that a borrower incurs or pays for obtaining a loan or mortgage from financial institutions such as banks. At representative APR of 1413%, a customer that borrows £200 for 2 months at a rate of 304.2% p.a. (fixed) will pay back £277.78 in total to the lender. At representative APR of 5,853%, a customer that borrows £150 for 18 days at a rate of 365% p.a. (fixed) will pay back £183.49 to the lender. This APR is far above the APR charged by banks and credit card companies for their loans.

The APR on loans charged by banks and credit card companies is usually in the range of 0% and 40%. By providing this low APR, banks and credit card companies can be seen as acting morally but the problem is that the vast majority of vulnerable customers that the Archbishop wants to protect from the act of immorality cannot benefit form this deal. Banks and credit card companies have stringent conditions to be met by customers that want to access the low APR. Such customers might be asked to provide collateral in the form of assets which can be taken over by the lenders should the customers default in repayment. Customers that go for payday lenders cannot meet these requirements and obtain loans from the financial institutions. Without payday lenders, therefore, it is very difficult to envisage how these customers can meet their daily financial needs.

By providing loans to customers who are considered by major financial institutions to be high risk customers, payday lenders are not acting immorally but taking a very big gamble. They may not be able to recover the money they lend to some customers. As a result, they have to charge customers high interest rate on their loans so that the profit that is made from the customers that meet their repayment plan can be used to upset the debt from the customers that default in payment.

In a nutshell, payday lenders play a very important role in society. They offer loans to customers who will otherwise not be able to obtain these financial credits from banks or credit card companies. However, whether the amount of interest they charge for these loans is moral will remain a subject of debate.

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