Payday Loans: a persistent Debt Problem
It is well known that payday loans are bad news. They can be financially dangerous due to their huge interest rates which add a lot on to the worth of the loan, and they are often criticised for targeting people who are already struggling financially. Since 2015, there has been less discussion about payday loans, but that doesn’t mean the problem has been solved. Although infamous companies, such as wonga.com, may be quieter than before, payday loan companies are still operating, and many of them offer loans that are as dangerous as ever.
The Original Problem
Payday loans have gotten a lot of people into financial trouble over the years. Their huge interest rates often mean you are paying back hundreds of pounds more than your original loan was worth in a small amount of time. To make matters worse, the people most likely to need such an unfair service are those who are refused credit elsewhere, which usually means they have a poor credit score due to already having, and struggling with, a number of other debts.
As we have previously reported, Students are increasingly turning to payday loans to make ends meet; young people are viewed as particularly vulnerable to the ‘slick’ and convenient online advertising and service of payday loans. Similarly, more recent research has revealed that NHS staff and council officials are also having to regularly turn to these loans to keep themselves solvent. In Leicester, the most common reason for needing a payday loan was simply ‘to pay bills’.
Furthermore, payday loans are not only bad for your finances. The Royal Society for Public Health revealed in March this year that payday loans are the ‘unhealthiest’ form of credit due to the devastating effect it can have on your mental health. While 49% of credit users who drink alcohol reported that their alcohol consumption increased due to their debt, this rose to 62% among payday loan users.
The End of the Problem?
‘But hasn’t the overall cost of a payday loan been capped?’ I hear you ask. The short answer is ‘Yes, it has been’, and this was certainly a step in the right direction. In January 2015, the Financial Conduct Authority (FCA) ruled that customers could never be asked to repay more than double the amount of the original loan and capped interest rates at 0.8% per day. Since this, much of the controversy surrounding payday loans has died down. However, as the above research demonstrates, the problem is far from over.
‘Medium-term’ payday loans
While the infamous short-term loans of ‘wonga’ fame may have been brought under control. There is increasing concern about the ‘medium-term’ payday market which often sees products that push the limits of FCA rules. One lender, for example, who directly advertises that they accept customers on benefits or already have CCJs, has a £500 loan that requires a £946.26 repayment, which is just £53.74 below the maximum repayment that they can ask of their customers.
Plenty of other high-cost credit products also still exist, such as rent-to-own schemes on white goods like fridges and washing machines, which are essentials for many families. Doorstep lenders, who visit you in your home at your request to offer you short-term high interest loans and, similarly, come to your home in order to collect the repayments, are another example of these high-cost lenders. The good news, however, is that the FCA is currently reviewing both of these lenders with reports due in May this year. Hopefully, they will increase the regulation on these types of loans to increase protection for the consumer.
What is our advice?
If at all possible, avoid these ‘medium-term’ payday loans. Even if it seems a lot of work, or even impossible, work on your budgeting and expenses to see what else you can do to survive short term. You may find that cutting out a habit, such a smoking, for a month can help you save in a financial emergency, or that a loved-one is happy and able to cover the cost of your emergency with an interest-free loan, if it is urgent.
Avoiding payday loans is particularly important if you already have other debts as repayment can quickly become a struggle. If this is the case, you may want to research all the various debt solutions that you may be eligible for. There are many different options that could suit your circumstance, particularly the amount of debt that you have, your assets, your location, and your surplus income. An IVA, for example, is best for people resident in England, Northern Ireland or Wales who have over £6,000 of debt and have assets they would like to protect from being sold, whereas a Minimal Assets Process is ideal for residents of Scotland who have no assets and no expendable income.
We completely understand, however, that sometimes it is absolutely unavoidable and you must get emergency credit. If your boiler breaks in January, for example, and you have nowhere else you can stay, you can’t possibly try to live without a boiler in the coldest month of the year while you save up for a new one. If you have nowhere else to turn, then there are ‘not-for-profit’, or ‘ethical loans companies’ who might be able to help you. These are not interest-free loans so you must be confident that you can pay the repayments, but their interest is more reasonable than normal payday lenders, hopefully making your financial emergency a little bit less of a financial burden. Credit Unions may similarly be worth looking into.
If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.