Opinion: Are payday loans impoverishing our neighbourhoods?

There is a central moral conundrum at the heart of the payday loan phenomenon.

It is that payday loan companies are designed to help people through what are intended to be unusual and temporary periods of financial difficulty.  Long-term and repeated use of payday loans is seriously expensive.

Yet – and here’s the rub – the business plans of most payday loan companies envisage growth.  Their business purpose, and the purpose of their investors, is to maximise their profits – and this is bound to be at the expense of some of the poorest families and the most vulnerable places.

My report for the New Banking UK project Can You Imagine an Ethical Wonga? tries to put some figures to the second of these.

The damage by payday loan companies to individuals is well documented.  But what about the places they live in?

The profits of the top ten payday loan companies in the UK were about £194 million, according to the Bureau of Investigative Journalism.  It is not clear how much the profits of the other 230 or so payday loan companies are, but the same report suggests that the turnover of the top ten is about 55 per cent of the total.

That suggests that we might extrapolate some guide figure.  Perhaps about £400 million a year is being extracted from the some of the poorest areas of the nation.

This will be an under-estimate because it excludes the money extracted to cover basic costs.  It is also a suggestion of what the figure might be, which is a reason for more research to pinpoint the amount being extracted more precisely.

If that is so, it is a serious problem, given that the way that money stays circulating in the most impoverished areas, from local business to local business, is a vital element in their economic resilience.

If there is an economic vacuum cleaner on the high street, it means that what enterprises survive locally will be that much less viable, and the neighbourhood that much more dependent on benefits and grants.

The loan companies point to the amount of money they are funnelling into the poorest economies.  But more research is needed about the long-term impact on the poorest local economies when the borrowers are expected to pay back the loan, but find the equivalent of 5,000 per cent annual interest as well.

At the heart of this idea is the theory that maximising the use of the money already flowing through the economy, so that it is passed from local business to local business before it flows away, can increase the economic impact without necessarily requiring new money.

If the real difference between a wealthy place and an impoverished place is how much money stays circulating there, then the impact of the payday loan companies matters very much.

In other words, the impact isn’t just felt by the person paying back the loan: it is felt by their neighbours as well.

* David Boyle is the author of many books and is co-director of New Weather Institute. Prosperity Parade is available on Amazon and as a downloadable pdf at http://www.newweather.org/2016/03/13/why-policy-makers-dont-see-the-next-local-economic-revolution/

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25 Comments

  • Eddie Sammon 24th Feb '14 - 5:39pm

    This article is so unbalanced it is offensive.

  • Eddie Sammon 24th Feb '14 - 5:43pm

    It is not only unbalanced, it is the fact you throw stones in it too.

  • Eddie Sammon 24th Feb '14 - 5:51pm

    You know what, I’m so sick of Lib Dems criticising businesses that I’m leaving the party. A truly centrist one will pop up soon. Goodbye.

  • Stuart Wheatcroft 24th Feb '14 - 6:30pm

    Can I suggest that you avoid quoting annual interest rates on loans that aren’t designed to be held for anywhere near that long. It’s highly misleading. Wonga and others are forced by (badly written) law to do it, but happily we are not!

  • Bill le Breton 24th Feb '14 - 6:41pm

    The business model is based on people not being able to pay the loan back on payday.

    Long live the Archbishop. Long live Credit Unions

    Down with sanctions targets.

  • A Social Liberal 24th Feb '14 - 6:49pm

    Eddie Sammon has obviously not seen the results of someone borrowing from these companies and not repaying the loans on time. Yes, the borrowers are partly to blame for going to loan sharks (for that is what they are) no-one should have to suffer the terms and conditions payday lenders insist on.

  • “It’s highly misleading.”

    Not, it isn’t. The only way a loan can be compared to other loans is if the same metric is used. APR is the most appropriate because that is what other loans use and it is quite proper that there is legislation in place to force the loan companies to state the APR. I only wish they were forced to do it in a larger font size.

  • Eddie Sammon 24th Feb '14 - 7:50pm

    Actually, A Social Liberal, around 18 months ago I personally borrowed from a payday loan company and failed to pay it back. I just don’t believe in socialism.

  • Paul in Twickenham 24th Feb '14 - 8:00pm

    @Bill – spot on. Ultimately the payday lenders are built on a model that encompass their own destruction – cf sub-prime with bait-and-switch – as it depends upon permanent expanding indebtedness. Wagner could have used it as a plot device for Götterdämmerung.

    @Stuart Wheatcroft – I agree completely that the APR looks silly on a 30 day loan. Perhaps the mere 399% APR that poundstopocket charge for a 1 year loan of £550 (repayable at £98.45 per month, total repayable = £1182.50) might be a more appropriate example, eh? For comparison my credit union will offer a £550 loan repayable at £50.42 per month (total repayable £605).

    So perhaps rather than worrying about how unfair it is that lenders have to quote an APR, we could instead invest our energies in aiding community-based credit unions to enable people to get out of the cycle of indebtedness. Isn’t that what Liberals are supposed to do? And if at the same time we can help out with that “no-one shall be enslaved by poverty…” that’s written on your membership card, then hey, how cool is that?

  • Eddie Sammon 24th Feb '14 - 9:13pm

    To clarify: I did eventually pay it back, it was just late. I’ll try not to be intolerant towards other opinions, but I’m going to try to leave you guys in peace anyway.

    Best wishes

  • Eddie Sammon 25th Feb '14 - 3:20am

    That’s fine David. No hard feelings.

  • Bill le Breton 25th Feb '14 - 9:10am

    David, you rightly concentrate on the supply side of providing a bridge for highly stressed people, but we do need to admit that as a part of Government we have extraordinary influence of the demand side – why people are driven to these ‘spivs’.

    Having helped a number of people who have been driven to seek finance and who have ‘stumbled’ into the clutches of payday loan companies I think the real avenue for immediate change is helping people avoid the trap of low pay, the changes to the benefit system and the failure especially of but not exclusively the education system to provide people with better life skills and strategies.

    The introduction of universal benefit with payments moving from two weeks to four and with the necessity of going on line, changes to emergency/crisis plus the appalling abuse of sanctions will all drive more and more people into these traps.

    The following story is not atypical. A claimant is required to go on a course. He arrives and attends the course. No one tells him or offers him the chance to sign an attendance sheet. He doesn’t. He is sanction for not attending. He goes to the Job Centre to protest. Luckily, one of those delivering the course is there and vouches for him. But the sanction procedure has started and it takes over two weeks to reverse the sanction. (You can always get a loan’ he is told.) The claimant is unable to replay a loan and the company continues to ‘sweep’ his account constantly to take any and all of what is in his account until the repayment is completed. Claimants are forced to accept benefits by direct transfer and therefore have lost total control over their money – all of it disappearing at 00.01 hours in the morning.

    At the very least there needs to be a stop to this trawling with some kind of limit on weekly repayments so that people are not left utterly destitute.

    As a commentator above remarks, there seems to be so little understanding of what is actually happening to highly vulnerable people – the victims of inequality doubly victimized by this system. It is indeed how the safety net is being destroyed day by day – sweep by banking sweep.

    You may also have noted that the loan firms are now targeting small businesses, so that your fears for small local businesses as the funds of many of their customers are sucked out of the community by payday loans will be compounded as those firms fall into the clutches of these loan sharks.

    It’s time to use the law to protect people and their communities. At the moment it is the wild west with the computer as the six-gun.

  • As Bill rightly highlights. — “…. there seems to be so little understanding of what is actually happening to highly vulnerable people – the victims of inequality doubly victimized by this system. “.
    But there is no excuse for not knowing. 26 Anglican bishops and the top man amongst English Roman Catholics have drawn these facts to public attention. Last week BBC Newsnight provided two objective and low key factual reports of the impact of “sanctioning” on people in need of social security support.

    For those in LDV who do not understand (or do not want to understand) here is a quick guide —
    For whatever reason you are the subject of a “SANCTION” so you have no money.
    You can get a loan which you cannot repay, and then you have a choice another loan or nothing to eat.
    If you have no job and you won’t take a loan, you can starve, go cold in the winter, lose your home, lose your family.
    If you have a job but the pay is so low you cannot afford the rent you can get a loan you cannot repay ….
    If you have a sort of job which is on a zero hours contract so you do not know from one day to the next if you will have any work, so you have no money, so you take out a loan you cannot repay …
    Expecting a pension at 65 ? They’ve moved the qualifying age, so you can …..

    The government which came into office in 2010 will be remembered for the bedroom tax , for the benefits sanctions, for payday loans.

  • Peter Chivall 25th Feb '14 - 12:21pm

    To return to Eddie Salmon’s initial response, to be critical of Payday Loan companies is not to be critical of business enterprise per se: it is to be critical of blatant exploitation of those in desperate need. Someone who falls into addiction to a narcotic from which he/she cannot escape without help is easy pray to a drug dealer. Someone who is ‘sanctioned’ by the JobCentre because his bus failed to arrive at his stop and he was 10mins late, is easy prey to a Payday Loans company. There is no moral difference between the two enterprises, just that one operates within the law as it is and one without.
    To those on low incomes, whether in work or not, the current Government seems determined to inflict hammer blow after hammer blow. Liberal MPs in Asquith and Lloyd George’s time would talk about the wealthy ‘grinding the faces of the poor’.
    I fear that any influence we may have had in ameliorating the worst excesses of the Cameron Government is a rapidly declining asset. It is no longer a matter of political appearance or financial rectitude.
    We are increasingly being faced with stark moral choices. “by their deeds shall ye know them”.

  • paul barker 25th Feb '14 - 4:33pm

    Do we want to treat adults as adults or not, thats the question. Its not one Liberals should have to ask.

  • Bill le Breton 25th Feb '14 - 4:59pm

    Paul, sometimes people need help to take and use their power – the systems are nightmarishly complex, in some cases the bureaucrats who people are having to deal with are incentivised to fail their so called ‘clients’, in others people have addictions and dependencies, in others they are experiencing family breakdown or deaths of loved ones, in others they are required to have the negotiating, verbal, computer and literary skills + knowledge + of para legals. They can’t get help from CABs that are underfunded or welfare rights teams that have been cut, they often require expensive public transport to pursue their cases.

    I can’t believe that you haven’t seen all this when doing your own case work. Your remark above is close to ‘let them eat cake’ in its lack of compassion.

    It is not patronising to help if in so doing you help increase someones ability to locate and exercise their potential. The ‘liberlism’ you describe is the liberalism of Thatcher with its ‘there is no such thing as society’ – We are not solitary beings, we are social beings, we help others and are helped in turn.

  • A Social Liberal 25th Feb '14 - 5:27pm

    To qualify my earlier post.

    I am not against lending money, I am not even against lending money to the poor. The banks by and large do right for the general public and credit unions look after the poor. What I am totally against are these companies who deliberately use their advertising to attract those who are unable to manage their money or who have too little coming in to be able to go elsewhere. That they then act in the manner Bill has described when borrowers are unable to pay them back is nothing less than dispicable.

  • I am puzzled by paul barker, what is it that he misunderstands by the word “adult”,

    My first job in 1973 with the DHSS was to help War Pensioners. At that time there were still survivors from the First World War in receipt not just of a pension by of various types of help from the Government. I was in my twenties, they were in their seventies. Were they not adults? Was the Government not treating them as adults? Was helping someone who had survived for more than fifty years after exposure to Mustard Gas not treating him as an adult?

  • Paul in Twickenham 25th Feb '14 - 5:56pm

    @paul barker – presumably you are suggesting that as Liberals we should provide people with the tools that enable them to live as independent adults rather than existing in permanent dependency and thus you are agreeing with the article?

  • A Social Liberal 25th Feb '14 - 10:53pm

    Paul in Twickenham

    Would you like to tell me how you would provide me with “the tools that enable [me] to live as [an] independent adult, rather than living in permanent dependency”?

    I have a brain disease that allows me to live normally some of the time, but then I deteriorate and have in the past spent 16 hours in the day asleep. I also sometimes have complete loss of control of my muscles which happens on the onset of high emotion.

    So, Paul – what are these wondrous tools that are going to stop me living in permanent dependency?

  • Paul In Twickenham 26th Feb '14 - 8:20am

    @A Social Liberal – it is perfectly obvious that I am referring to a dependency on the vicious cycle of debt where the original can never be repaid. You are deliberately taking the remark out of context – a classic straw man argument.

  • A Social Liberal 28th Feb '14 - 1:28pm

    Paul

    Thanks for the clarification. The only way that the dependency you speak of latterly can be addressed is to ensure that the companies involved in spivving are prevented from doing so.

    *I would cap the amount of interest borrowers can be forced to endure for late payment
    *Those claiming benefits should not be allowed to take out a payday loan
    *Payday spivs should not be able to control the bank accounts of those who borrow from them.

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