Amigo loans is a long-established UK sub-prime lender. It operates a business model that targets vulnerable customers with high rate personal loans. And in today’s Irish Independent, it is reported that the Central Bank of Ireland has granted the company regulatory clearance to operate here in the Irish market.
While the UK is still a member of the EU, services in that country are free to operate here as long as they abide by financial service and consumer rules.
Amigo says it lends to people with impaired credit or poor income. In other words, it lends to people that are financially vulnerable, who cannot get credit from mainstream lenders. Some industry people call it risk-based lending.
The key to success for lenders such as Amigo is a practice known as risk-based pricing. In other words, lenders such as Amigo charge their customers higher rates of interest; this is to protect against those that do not pay.
Excessive interest charges
On it’s UK website, the rate of interest Amigo quotes is 50% (49.9% to be exact). That’s 5 – 0 percent, not 5%. 5% is what one might expect to pay for a car finance loan in the Irish market (or lower with many PCP deals). To put this in perspective, Amigo charge 10-TIMES more for a car loan than many banks and credit unions up and down the country. Even credit cards, many of which charge 18% (and are ‘unsecured’ debts) are a bargain by comparison.
Having their cake
It might be a stretch to say that Amigo’s interest rates are a feature of the risk they are taking on board but Amigo itself debunks this notion very, very quickly. Here is why: Amigo eliminates most of the risk that would normally come with such loans through their loan guarantor model. In other words, if the borrower does not pay, the guarantor acts as the final backstop. The answer to this question is not one of risk mitigation but of sheer profiteering. With the risk reduced through the guarantor, the excessive pricing is simply to maximize the company balance sheet and bottom line.
Why did Central Bank approved them
Of course, this is still early days. Amigo may well enter the Irish market with a pricing model that is far cheaper than the UK. However, it is more likely they will seek to replicate much of their UK formula here. This would be a typical maneuver for expanding companies, especially that look to bolster that model. To back this up, Amigo are reported to be preparing for a market float which means they want to expand their business model, not radically alter it!
Which brings the conversation back to the regulatory clearance. Why is the Central Bank approving a lender that operates a predatory pricing model in the UK?