Opinion: Payday loans – a never ending debt

IOU in a piggy bank - Some rights reserved by Images_of_MoneySouth Central Region Liberal Democrats have discussed and passed a motion against Pay Day Loans at our Regional conference in the autumn of 2012. The notion of such loans is valid: provide a small short term loan for those in need to help them through immediate financial hardship. Unfortunately, exploitation is what we get.

Here are some facts about these loans:
Which estimates over 800,000 UK households have taken out payday loans;
• The Consumer Credit Counselling Service says over 2,000 of their clients in 2012 have had five or more payday loans, compared to 716 for 2009;
• Some payday lenders are charging APR of over 4,000%;
• A charity that helps such lenders said the number of people seeking help with payday loan debts soared from 6,491 in 2009 to 17,414 in 2011 and in 2012 this had exceeded 22,000;
• Citizens Advice Bureau says that the checks to ensure borrowers can pay back their loans, are only carried out about 35% of the time;

This is a pretty desperate situation. As a region we passed a motion to restrict the maximum APR that payday lenders can charge. In our motion we advocated an upper limit of 50% APR and to limit loan providers from using extra charges for late payment or administrative costs to recover the income lost from these extortionate rates.

Contrary to what some members feel, I found that Ministers and Party HQ were very receptive to our resolution. The discussion on this motion at our regional conference echoed the comments of Jo Swinson (Consumer Minister) when she said “The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning” at the launch of short and long term initiatives to curb the payday market – head on. There were a number of good initiatives announced; I have highlighted some of them below:
• To clamp down on irresponsible practices and blatant non-compliance;
• To work with OFT and advertising industry to introduce tougher advertising codes of practice;
• To improve compliance with payday lending codes;
• To tackle the growing problem of people taking out multiple loans in one day;
• That Jo Swinson will talk to key members of the industry in person and call them to account;

I am very pleased to see that as a party we have taken lead and welcome all the initiatives Jo announced. I am, however, concerned these exorbitant interest rates were not capped and am convinced this punitive action should not be held as a possible future action but implemented now.

People on low pay should not be vulnerable to these legalised loan sharks. As a party that works to emancipate society from unfair conditions, prejudices and strives to ensure a fair and level playing field for all, we cannot fail those who are suffering disproportionately under the current economic climate and are clearly fodder for these objectionable companies who in reality are making life more difficult for them.

* Tahir Maher is a former Chair of South Central Liberal Democrats and lives in Wokingham.

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31 Comments

  • I’m as strong a believer in the market as you’ll meet, but there’s no decent argument against an upper limit on the rate of interest that can be charged, so as to protect the desperate and the just plain daft. It’s incomprehensible that the government hasn’t introduced one.

  • Eddie Sammon 13th May '13 - 1:16pm

    Absolutely bananas communist unworkable policy. Are you professionally qualified actuaries? I would like to know how you have quantified that the maximum APR is should be 50%.

    The only fair way to get the cost of payday loans down is to allow competition to enter the market.

    I’m sick of middle class people telling the poor what’s good for them. People need payday loans and if you limit the interest rates by so much then the loans will disappear and people will resort to other measures instead, such as crime. This is the same mentality that causes middle class people to tell poor people not to buy clothes from Primark.

    I’m not a right winger, I’m staunchly against the benefit cuts and public sector privatisation, but policies such as this make me think perhaps I am wasting my time in the Liberal Democrats.

    “People on low pay should not be vulnerable to these legalised loan sharks”

    More like people on low pay should not be vulnerable to economically illiterate control hungry politicians.

  • Eddie Sammon 13th May '13 - 1:21pm

    Here’s some customer feedback from Wonga:

    95% of our customers are satisfied with the overall Wonga experience
    96% of our customers feel well informed whilst using Wonga
    86% who have used another online lender rate Wonga’s service better
    96% of our customers agree our service is easy to use

    However we still need the government to jump in and tell them how to provide their service.

  • Eddie Sammon 13th May '13 - 1:24pm

    Chris, going by your attitude of maximum prices, why don’t you advocate maximum fees for plumbers too? I mean surely plumbers are exploiting people’s leaking pipe situations.

  • Andreas Christodoulou 13th May '13 - 1:25pm

    Cap payday loans and they’ll become unable to take the risk to lend to them. Which will mean that credit is unavailable to these people. Now, admittedly, that’ll stop them paying exorbitant interest rates, but it’ll mean they can’t spend any money at all. No banks will lend to them at low interest rates, and they can’t get credit cards.

    Unless you’re suggesting that we have a government scheme to do this kind of lending, and let the taxpayer foot the bill for defaults, etc, your suggestion will just force the poor to go to loan sharks whenever they have need of money.

    ^@Joe – completely agree.

  • I contacted my local MP Hazel Blears She passed my info to Vince Cable And result Vince replied to me in a positive way think he understands the insidious position on low incomes face and those taking advantage of good on him thanks an Hazel too

  • If a plumber turns up, fixes a dripping tap and then demands £20,000, trading standards will make mincemeat of him.

  • Colin Strong 13th May '13 - 2:34pm

    http://www.cfa-uk.co.uk/information-centre/industry-briefings/current-briefings/should-uk-payday-loan-costs-be-capped.html

    If caps on APR are introduced then community alternatives such as Credit Unions need to be promoted.

  • I don’t know what’s worse, the ignorance or the populism.

    Credit providers are legally obliged to use APR as the method of calculating their loans, and whilst it is an excellent way of working out a mortgage, it breaks down when applied to small-scale finance.

    Take the Provident for example. A loan of £100 for about three months and repaid weekly is over 1000% APR, but a repayment of only £140 total, with an average payment of £10. Hardly criminal.

    A ‘limit’ of 50% APR shows this up as a policy not-thought-through. Not only does it fail to understand the system of credit provision, but also ignores alternative providers – like credit unions who’ll charge something like 2-3% APR.

    And lastly, a loan shark is not something that can be legalised – a loan shark is an illegal (unlicensed) provider of credit.

  • Rate caps are one thing – but I’m not sure that using APR measures for loans which aren’t for anything like a yearare a particularly helpful measure.

    Eddie – “The only fair way to get the cost of payday loans down is to allow competition to enter the market.” What are the barriers inhibiting competition in this market

  • Paul in Twickenham 13th May '13 - 5:08pm

    The context-sensitive pop ups on this website are currently advertising… pay day loans! I clicked through to the advertisor (thus presumably generating revenue for LibDemVoice) and found this representative example:

    Borrow £300 for 30 days, Amount payable – £375, Interest – £75, Interest rate (pa) – 1737% APR (variable).

    For comparison, here is the cost of a loan with my local credit union:

    Loan Sum £1,000 12 Monthly Repayments of £89 Total Interest paid £67 Value of savings at end of loan £312

    In other words, a 12 month loan where you pay much less interest than to a “pay day” lender, and end up with a savings account with £312 in it.

    It is a shame that credit unions are not as well rooted in England as they are in Ireland where their impact is huge and positive.

    It would be a fine legacy for Liberal Democrats in government if they were to take positive action to end the vicious cycle of dependency on doorstep lenders that plagues England’s poorest areas. Enabling the virtuous circle of saving in credit unions that are rooted in and grow from the communities they serve would help to transform lives blighted by permanent indebtedness.

  • True, the APR on these loans is spectacularly high, but people pay bills in Pounds, not Percentages.
    If a high street bank is going to sting you for £30 in charges for bouncing a direct debit, paying, say, £20 over a month for borrowing £100 is a better deal.

  • Paul In Twickenham 13th May '13 - 8:23pm

    @Alan Jeffs – I just used the helpful calculator on the front page of wonga.com. It told me I could borrow £100 for 1 month and the total cost would be £136.72. That’s a far cry from the £20 you suggest. I then checked the HSBC website and asked how much I would be charged for an overdraft of £100 for 1 month. The answer was £1.50. That is considerably less than the £30 in charges you suggest.

    Now clearly there will always be people who have no sense of financial discipline and will live fraught lives. But for many people it is a question of giving them the means to break free of the cycle of pay day lenders.

    I am surprised by some of the comments above – comments that seem to show a surprising lack of interest (no pun intended) in doing anything about this situation. Indeed comments that seem to condone the status quo. Very unlike Liberal Democrats. Sufficiently unlike Liberal Democrats that for the first time I believe I am seeing some evidence of “astroturfers” on this site.

  • Eddie Sammon 13th May '13 - 10:17pm

    Hywel asks a sensible question to which I am not sure of the answer: I do not know what the barriers to entry into the market are but it is a relatively young mainstream market and competition has been increasing. One thing for sure is that we shouldn’t cap APR at 50% because that makes the business model inviable and remove any hope of competition.

    Let me do some maths: If the people who passed this motion think that 50% should be the maximum charge then why don’t they start lending £50 to strangers struggling financially for a week in return for 39 pence interest before costs?

    I’m not saying we shouldn’t regulate the industry, but personally I think we need to look at why such poor motions are being passed in our party.

  • I am deeply unsympathetic to the people arguing there should not be a cap on the grounds of the freemarket and competition will resolve it. That is ridiculous, the reason the payday lenders exist is because they get round the restrictions imposed upon other authorised lenders who therefore are unable to engage in this market. If we deregulate further with more competition then Barclays, Tesco and HSBC would be offering these products too.

    Why don’t they? Because they are in the most cases unsuitable for most people except those with v temporary cashflow problems. Why are MP’s and Groups with experience annoyed, because there is incontrovertible proof of abuse of self-regulatory provisions, targetting vulnerable customers and borderline criminal activity in terms of repayments and arrears (and evidence of convicted criminals involved). In terms of competition, once the OFT closes down one payday lender for poor practise, another one ends up opening in its place which is even more cutthroat. The biggest barrier to entry is really your own morals.

    I agree with the motion except the regulation and enforcement of that regulation should be transferred to the Financial Conduct Authority. The products should not be exempt from the current provisions for the regulation of marketing and promotion of financial products which gives recourse to those missold a loan.

    Furthermore, until the OFT completes its investigation properly, no further lender should be licensed to enter the market. Existing payday lenders should undergo regular basic criminal checks and all existing complaints are redirected to the Financial Ombudsman Service. Lastly, the FCA should reconsider imposing capital requirements on these firms where they engage in lending to risky customers or where its clear due diligence has not been conducted.

    For Eddie Sammon and Chris, you should be ashamed of yourselves for not seeing why something which has been the subject of countless correspondence to MPs and Ministers due to both the economic and social harm caused can be solved by the “market”. It implies you haven’t got an inkling of the way the vulnerable are being fleeced and people in debt are being harassed by those who deliberately set out to get them into debt to profit. Nor do you understand market dynamics.

  • Simon McGrath 14th May '13 - 9:30am

    For those who like evidence based policy making the University of Bristol has a study on this. It doesnt support a cap

    http://www.bristol.ac.uk/geography/research/pfrc/themes/credit-debt/pfrc1302.pdf

  • Andrew Colman 14th May '13 - 10:12am

    Time to effectively ban these payday loan companies who are commiting (the sin of) usury. by setting a legal maximum interest rate, I suggest about 40% per annum.

  • Andrew Colman 14th May '13 - 10:20am

    To answer the question

    “Where do people go if the payday loan companies are shut down.?”

    Answer: The government should be lender of last resort offering loans through the benefit system or through selected institutions such as the post office. Compared to the overal cost of the welfare system , (which for example gives 45% tax reliefs to the pens ions of miillionares) , the cost of being a lender of last resort will be microscopic.

  • Andrew Colman 14th May '13 - 10:25am

    If I had my way

    Loand sharks would be tied up against the wall and shot!

  • Eddie Sammon 14th May '13 - 1:06pm

    I see Liberal Democrat modernisation still has a way to go then.

    The taxpayer should not provide these loans. First of all they would lose money on them (going by the low interest rates you would want to charge) and second of all the taxpayer wouldn’t want to pay for them.

    I can’t see people who actually use these things shouting for them to get banned. The calls just seem to come from others who want to wrap the public in cotton wool, but the public does not want to be wrapped up in cotton wool.

  • Eddie Sammon 14th May '13 - 1:14pm

    Even if some people who use them would like them to be provided by the government instead, you would never get consent from the taxpayer.

  • Eddie, you’re right. The taxpayer does not have a role in financing or underwriting usurious loans. Nor do I think was that really meant. I think it was a reference to the old hardship funds to tide people over which was cut back. That functioned like an advance on your benefits, but I personally think that should be a sparing use of welfare to avoid the risk of dependency.

    I do believe a suitable policy is likely to be a moratorium with a simultaneous action on doorstep lending while authorised and regulated lenders should reconsider the design of credit facilities for those that are essentially financially excluded.

    There is a reasonable argument for a cap but I see that as hard to enforce. The root problem which users themselves complain about is the ‘unfair contracts’ entered into. If a regulated entity behaved similarly, it would have been fined heavily. I personally would suggest contracts where the lender has overstepped the law should be rendered null and void. Those remaining doorstep lenders should face the same capital requirements as banks lending in similar risk categories.

    I fail to see how people/ministers who acknowledge the concerns raised in this issue are not modernised libdems. Freedom to be indentured in debt is not liberty, and more so, is unjust when it targets the most vulnerable in our society for a quick buck.

  • “Answer: The government should be lender of last resort offering loans through the benefit system or through selected institutions such as the post office.”

    There is such a last resort system in the benefit system in the form of Crisis Loans. I suspect most of the people taking out Wonga type loans aren’t eligible for them as they are in work

  • Eddie Sammon 14th May '13 - 1:42pm

    sfk, thanks for your reasonable reply. I’ll agree to disagree over this issue. I’m all for regulation, just not what I think would be excessive.

  • Andrew Colman 14th May '13 - 6:54pm

    Only the poorest in society are likely to be using payday loans (others will goto mainstream banks who offer much cheaper credit) . I expect the overwhelming majority of these are reliant on benefits one way ore another eg housing benefit, family credit, income support. A study should be done on who actually meets the costs of the charges that pay day loans demand. I expect in a large proportion of cases, the cost is ultimately met by the taxpayer through extra benefit costs and other costs of poverty such as crime and disease.

    Thus I believe that a well organised government scheme to be lender of last resort could actually save public money in the long run.

  • Andrew Colman 14th May '13 - 7:00pm

    Eddie Saumon , your comment “I see Liberal Democrat modernisation still has a way to go then. ”
    suggests that your party affliation may not be Liberal Democrat????

    I disagree fundamentally with this statement. The Lib Dems have been in the vanguard of policy making eg raising tax thresholds to 10K, the flat pension rate, development of green technology. Unfortunately, many in politics and the media are still wedded to the mickey mouse economic system that caused the 2008 crash. It is the lib Dems who are leading the change to a new and workable economics, eg ALTER and the Land Value tax

  • Eddie Sammon 14th May '13 - 7:27pm

    A Net Asset tax is much fairer than the Land Value Tax. Anyone who wants to introduce a new progressive, non discriminatory tax to fund public services is firmly a Liberal Democrat.

    I don’t have a massive objection to a government run scheme to replace payday loans, but this motion does not mention a government run scheme.

  • Credit Unions are something i have felt the Party shold be promoting a lot harder, i have done for some while. For a Credit Unions to work it NEEDS SAVERS. I save money in my local Credit Union, how many of you reading this also do so?? They need savers to be able to lend 🙂

  • Eddie Sammon 15th May '13 - 2:09am

    The trouble with credit unions and cooperatives is that they say they are not for profit but they can pay salaries as large as they like. The Co Op bank miss sold as much as anyone and one of the reasons why it is going bust

    To prove my hypothesis, last year The Co Op made a loss of £634 million and paid their former CEO a leaving package of £4.6 million despite destroying the bank. They were also fined for miss-selling PPI.

    Government’s are no more trustworthy either: for instance the government has recently launched a “not for profit” financial advice service, yet the head is being paid a package worth £350,000 per year. Great use of other people’s money.

    It is also the problem of handing over health and education budgets to the GPs and headteachers – many will just pay themselves large remuneration packages.

  • Chris Randall 15th May '13 - 1:56pm

    Funny isn’t it when I was young people borrowed from a tallyman he worked like this you borrowed £10 and paid it back over 21 weeks at 10 shillings a week so you borrowed £10 and paid back 20 guineas. So in fact you borrowed £10 and paid back 50p a week for 21 weeks can anyone work out the APR on that? Because if they could make a profit on that then modern loans companies should be able too after all there where a lot of tallymen about .

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