Friday, 7 November 2008

Credit Crunch? Depends How You Look At It

An interesting direct mail advertising offer popped into our mailbox a few days ago. Provident Personal Credit is actively offering cash loans from £500 to £500. Huh? Everything one reads these days about credit is that no one can get a loan, even the most creditworthy. But Provident is gung ho seeking clients, even if "you have been turned down before, you have a poor credit history, you're not working at the moment"!

How can they do this successfully? As their flyer says, "We'll base your loan on your circumstances and how much you can afford to repay." The parent company Provident Financial's Interim Management Statement of October 22nd gives further clues to a tightly run operation:
"... all loans are underwritten face-to-face in the home, which provides a sharp assessment of each customer's character and current circumstances. Home credit loans are for small sums repayable over a short period of typically a year and agents visit each customer on a weekly basis to collect the repayments, thereby continually updating their view of customers' circumstances. Not only are customers and their circumstances well understood, but since agents are paid commissions based upon collections rather than on the credit issued, there is no incentive to extend credit that the customer is unable to afford."

There is none of the sub-prime mortgage loan nonsense of agents paid for originating loans that were then sold off in parcels to other banks far away who had no clue of loan quality or contact with the debtors.

And the results bear out the accuracy of management's words. The July 30th, 2008 Interim Results showed a 34% increase in Profits before tax and a 28% rise in earnings per share, with loans and customers also growing. The company is hiring too as these ads on show, another sign of continued growth. No credit crunch here it seems.

Management's forecast is quite positive: "... Our conservative approach to lending, combined with the group's strong balance sheet and funding profile, means the group is well placed to continue to generate high quality customer and profits growth."

The share price (PFG on London Stock Exchange) is down only 3.8% over 1 year, a darn sight better than the minus 33.5% for the FTSE All-Share. Thanks to Google Finance for the graph below.

What's the catch? Depends on your viewpoint perhaps but the 183.2% typical APR interest rate exceeds the bounds of reasonableness. The rate is plainly and prominently visible on the ad and on the website home page, so no one can complain they don't know what they are signing up for. And considering that clients are often those who cannot qualify for, and do not have, loans elsewhere, maybe there is some value to those who borrow from Provident. Still, 183.2%!!!

The downside for borrowers is the familiar debt trap, where people get in and cannot get out, as this one tale from a Provident customer demonstrates with an interesting response from a Provident agent. Crunched by credit indeed.

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