Debt is an unfortunate fact of student life. Rising tuition fees, the spiralling costs of private rents and financial demands of a busy social life add up to typical debts of £40,000 upon graduation.
For students who are not swots when it comes to managing their money, the true costs could be even higher. Overdrafts and credit cards are commonly used to smooth over the student’s lumpy income (typically termly) against outgoings like rent and bills (typically monthly). But for those who can’t stretch their student loans far enough, taking on more debt might seem a better option than a grovelling phone call home to their parents.
Smart-Pig is a payday lender set up specifically to meet this need. Its online platform offers loans secured against income from future student loan payments from the government. These can hit a student’s bank account within an hour.
Its website says: “Out of cash until your next student loan? Smart-Pig lets you borrow up to £350 in an emergency”. In smaller type, the annual percentage rate (APR) of 1,017 per cent is displayed.
Its founders, Shreiff Benazina, aged 26, and former Goldman Sachs trader Tom Parks, 27, say they spotted this lucrative gap in the market when they were students themselves.
Mr Benazina says that students are typically low on cash for short periods of time, left adrift by the late payment of their hefty student loan, or having run out of money before it arrives.
This is where Smart-Pig comes in, says Mr Benazina. He is keen to position the company, which is regulated by the Financial Conduct Authority, as an “ethical” short-term lender and “an alternative to Wonga” and other payday lenders.
“I wouldn’t see Wonga as a direct competitor,” he says. “Our priorities are different from other short term lenders.” He stresses that his company is providing a much-needed service by lending against already guaranteed loans.
“We require [students] to provide a copy of their student loan timetable, and we’ll never let them owe more than 30 per cent of their student loan,” he says.
But critics have raised fears that people borrowing against their forthcoming student loan will risk being being trapped in a cycle of perpetual debt.
According to the National Student Money Survey 2015, two-thirds of the student population say they struggle to live on their student loan. Currently, the maximum maintenance loan for undergraduates is £6,000 a year, working out to £2,000 per term.
The high costs of obtaining short-term credit mean interest payments will only add to this burden. But the idea that a student loan might be used to pay back another high-interest short-term loan has raised concerns among student bodies.
Smart-Pig has come under fire from several quarters already — the National Union of Students has declared it “predatory”, while Walthamstow MP Stella Creasy has said that to call companies like Smart-Pig payday lenders is a misnomer.
“It is heinous that this is not borrowing against an income — it’s borrowing against a loan. Before students have got to the point where they can earn money they are doubling their debt,” she said in an interview last December.
Smart-Pig had a slap on the wrist from the Advertising Standards Authority in March for an ad campaign that offered customers a “prize” of winning a term’s rent, which appeared on billboards and beer mats. This prompted concerns that students could connect taking out a short-term loan with purchasing alcohol. The ASA ruled the ads were “irresponsible”.
In its defence, Smart-Pig said that it went above and beyond the new curbs placed on payday lenders by the financial regulator. Those rules, which only came into force this month, cap the amount of interest and charges that payday lenders can legitimately claim from their clients at not more than 100 per cent of the original loan amount. Default charges on missed payments — for which payday lenders were notorious — are now capped at £15.
Smart-Pig has gone further by capping its own maximum-allowed debt at 50 per cent of the size of the original loan. It only offers loans of up to £350 — although it does charge the top interest rate tolerated by the FCA of a steep 0.8 per cent a day.
As its own website sets out, if students were to borrow £350 for six months, they would be hit with a £175 charge, repaying a total of £525. The date of the required repayment is typically the date the actual student loan hits the student’s bank account. Smart Pig also offers borrowers a ten day “grace period” if the student loan is paid late.
The Debt Advice Foundation, a charity providing free and impartial debt advice, is concerned that payday lenders like Smart-Pig are muscling in on territory that banks avoid.
“Generally, young people are no longer able to accrue large unsecured debts because many forms of mainstream credit are now unavailable to them — a result of banks tightening their lending criteria due to the past recession,” says David Rodger, chief executive officer of DAF.
Short-term lenders tend to have “much less rigorous checks and controls in place”, he adds.
Smart-Pig says it looks at students’ mobile phone contract repayments and bank current account behaviour before deciding whether someone can be trusted to repay their loan.
Is this good enough? Smart Pig claims its default rates are low, but maybe default rates aren’t a particularly useful metric.
While a low default rate is good news for Smart-Pig’s profit margin, it doesn’t really give a picture of whether students are living comfortably alongside their enlarged loan repayments.
Many student unions around the UK have pushed back against short-term lenders, banning them from advertising to students on campus and going to great lengths to promote their respective university’s hardship funds as an alternative.
“Often students don’t know there are hardship funds available to them or that they can get general support from their students’ union advice centre on how to manage their money,” says Shelley Asquith, NUS vice-president.
“This would help them avoid getting into these situations in the first place.”
Smart-Pig, for its part, is sticking with the student market and plans to expand its services into new areas.
“We don’t just want to do loans,” says Mr Benazina. “We want to help people find accommodation and practice for job interviews.”