Payday Loans

I feel quite pleased that Wonga went into liquidation. I am sad for their employees (as we all have families to support) but I am sure the directors will walk away with their egos bruised and millions from ill-gotten gains. Companies like Wonga are effectively no more than legalised loan sharks.

Looking at a quick comparison between payday loans for short-term loans the APR varies from 500 per cent to just under 1600 per cent a year. A survey by the Royal Society for Public Health ranked payday loans as having the most detrimental effect on mental health well-being. There are nightmare stories of people who have up to 8 payday loans to service their debts. On average people hold three payday loans at a time. Agencies that support and assist people with payday loans relates to loans that are over 100 million pounds for well over one hundred thousand people. Those in poverty already pay a poverty premium (the poverty premium is calculated to cost a low-income family on average £490 a year) therefore reducing costs from any spend is crucial for them as it allows more cash in their pockets. Increased inflation and low wage increases hurt low-paid families disproportionately and they are the ones most likely to use payday loans.

We can learn from the US here; fifteen states have banned payday loans. Although, in the UK, we have capped loans I for one would be in favour of a similar ban. However, we need to tackle payday loans, excessive credit card rates and charges from unauthorised bank overdrafts (I remember that at one time a large high street bank was changing equivalent to 4,500 per cent APR for an unauthorised increase to an overdraft). Limiting the harm payday loans can do is now even more important because of increased wealth inequality and a shrinking welfare state.

What can be done to assist those who take out (or are thinking about taking out) payday loans? I would like to see interest charged by credit cards and payday loan companies to be capped further. I would cap it to no more than 50 per cent APR (my personal preference would be to ban such companies altogether – but that is unlikely). I would support a more significant role for and access to Credit Unions. People should get more support to access agencies (like National Debt Relief) that assist them to get out of or ease their debt burden.  There needs to be better data sharing in the industry to stop people from taking on more than one payday loan. The government should caution and better inform the public about the dangers of payday loans.

 

 

 

* Tahir Maher is the Wednesday editor and a member of the LDV editorial team

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26 Comments

  • An unfortunate side effect of the demise of Wonga is that it is unlikely that those owed compensation for its mis-selling of loans will get their compensation – or will only get a very small part of it. As they are unsecured creditors – well back in the queue for payouts from the administrators

    We should campaign hard for the Government to underwrite the compensation. It would be an absolute OUTRAGE if rich bankers having been bailed out, poorer citizens by definition struggling on the breadline do not get their legal compensation.

  • Easy as it is to dismiss the likes of Wonga as legalised loan sharks, their business model is still preferable to actual loan sharks. There needs to be an alternative for people who find themselves in need of emergency repairs that don’t have a slush fund to dip into, or family and friends who can chip in.

    This cannot be done in isolation from our need for better financial education in schools and across the community as a whole. We must also consider things like funeral costs, and how many feel pressured into spending much more than required at a time when they are most vulnerable.

  • William Fowler 5th Sep '18 - 8:27am

    The interest rates are so high only partially down to greed, the other reason is that the default rate is so high… by capping loans and credit cards at say 5 per cent above base rate then the people lending the money would only lend money to people who could afford to pay it back.

    There are laws to deal with company directors who abuse their businesses but they don’t seem to be used often. Also, their is nothing to stop the govn doing a tax audit on the directors…

  • “I would cap it to no more than 50 per cent APR”

    That would probably succeed in your aim to kill them off. A £200 emergency 1 week loan at 50% APR would roughly allow an interest charge of £2 or so. That wouldn’t even cover the cost of Wonga staff picking up the phone.

  • Mick Taylor 5th Sep '18 - 8:58am

    PT. Many banks these days give you a fee free £200 overdraft, if not perhaps you should change to one that does.
    In any event, except for the relatively few people who don’t have even basic bank accounts, it is much cheaper to get an overdraft that a payday loan.
    Fiona. I respect your view but think it is wrong to allow companies to charge totally immoral interest rates and to leach off the poorest in society. The sooner payday loans are outlawed the better.

  • It’s not Wonga and the like we should blame, it is the system that allows (encourages) them to flourish.
    Delays in Universal credit, employers who pay wages late. letting agencies retaining deposits for spurious reasons, banks charging £30 for a letter telling you you are £5 overdrawn, etc.
    When we were in coalition these conditions increased, as did the vultures like Wonga.

    The main growth in the LibDem party seems to be in selective memory.

  • Tahir Maher Tahir Maher 5th Sep '18 - 9:41am

    @expats – I don’t fully accept your comment. When we were in coalition I was a Regional Chair. I made much at the regional conferences about companies like Wonga. I chased up Christian Moon and the FPC about the large APR that such companies were charging. I advocated an upper limit of 50% APR.I believe it was Vince’s department that actually brought in a law to limit the large APR’s being charged – so we did do some good. I agree with other comments – but hindsight is a good thing. We did raise our opposition to Universal credit but it is only when it has been used (in anger as it were) have we realised how badly it has been implemented.

    I agree we should have done more when in power (especially about not selling the Liberal message) but I for one am quite proud of what we did achieve.

  • David Evans 5th Sep '18 - 9:54am

    Tahir,

    It is very easy to say you are quite proud of the things we achieved, but that is just looking at a few pluses. However, are you ashamed of the bad things our leaders allowed the Conservatives to do? Even though they were warned by other Lib Dems (and the voters every May) of the mess they were making of it?

    Perhaps the key question is “Do you think that the Lib Dems are closer to building and sustaining that free open and fair society we all aspire to than we were in 2005?”

  • Tahir Maher Tahir Maher 5th Sep '18 - 10:10am

    @David – I really don’t want to get into this side debate. But I will do a piece on this. However, the point I was making is that we did good but also we messed up on chances that would have changed our society for example PR (very badly managed) and changes to the house of Lords etc. I wasn’t for coalition I didn’t want it, I was not in favour when we were in it and still feel that we should have managed our ‘partnership’ with the Tories differently. But as I say I will speak to this in another piece.

  • Jack Graham 5th Sep '18 - 10:33am

    This is a strange essay, are the middle class unaware of the rationale behind people taking out high interest loans, it would seem so.
    The advertising on TV of comfortable middle class people taking out emergency temporary loans, seems to have been very effectiuve, having thrown a fuzzy cloud over the reality that most people take out these loans out of desperation, and if it is made harder, it will just drive them to loan sharks.

    There are some people in our society who no matter how much money they are given, will remain financially incontinent. It is naive in the extreme to think that by clamping down on the interest rate these companies running these businesses that have horrendous default rates, will just carry on at a loss. They won’t, or they will go bust just like Wonga.
    As for this talk of Credit Unions, even these non profit organisations charge 50% APR for loans, and I doubt many would lend to people who are unable or unwilling to save, after all it is peoples savings they lend out.

    Perhaps people on here should walk in the shoes of those they claim they are trying to protect, before telling them ‘ I am from the government, and I am here to help’

  • @Mick, as I’m the only Fiona to post this, I assume you mean me when you say “Fiona. I respect your view but think it is wrong to allow companies to charge totally immoral interest rates and to leach off the poorest in society. The sooner payday loans are outlawed the better.”

    You may respect that view, but it isn’t mine.

    I did say we needed to be realistic enough to accept that people will need money at short notice, but in no way should that be taken to mean that I’m OK with anything that isn’t an actual loan shark. Quite the contrary.

    And as good as it sounds to say that people should just open a bank account with a free overdraft facility, that is out of touch with the reality for the very people who rely on payday loans. Many will not have access to such an account. As usual, it’s the better off in society that get the best deals from banks. And those who are earning enough to have a decent bank account, but struggling, are likely to have already eaten into their overdraft allowance. New boilers cost more than £200, and if you need your car to get to work, then you will have to pay for repairs to keep it on the road, not shop around for a new bank account.

    Much of this can and should be addressed through better financial education, so people get the right sort of bank accounts, and the best loans if need be. Ideally, they are encouraged not to rely on their overdraft for day to day living, unless they really, really need it, but unfortunately many are dipping into their overdraft for food shopping.

    Credit Unions are definitely something that should be expanded and better advertised. And I note that the advert I see that comes with this page is for online loans available today. I’ve no idea if the company is responsible, but it’s a reminder that advertising and ease of access is an important criteria to consider. Can we make it easier for people to access Credit Union loans than those from less responsible lenders?

  • Tahir Maher 5th Sep ’18 – 9:41am……@expats – I don’t fully accept your comment……

    Nor, I, yours.

    Clinging to the notion, “That we made things a little less bad” is a poor excuse when we held the balance of power to a far, far greater extent than the 10 DUP members do at the moment.
    I still believe that those at the top, Clegg, Alexander, Laws, Cable*, etc. were not unwilling participants but were merely reverting to their ‘Tory lite’ beliefs.

    As for Vince Cable being responsible for ‘capping’ APRs…In opposition Cable stated, “At a time when official interest rates are close to zero and inflation is very low or negative it is unbelievable that people are being charged thousands or hundreds of per cent in interest.” The result of Vince’s ‘Cap’ was that Wonga was still able to charge a representative APR of 1,509%, while QuickQuid’s rate was an APR of 1,212%. The demand for real change was led by ‘Compass’ (a Labour affiliated group).

    *Aligned with Fallon in reducing employee protection and safety regulations (Cable led the drive for deregulation; notably the “Red Tape Challenge” to reduce existing regulation). He was responsible for the introduction of tribunal fees for employees making claims against employers, he enthusiastically supported the public spending cuts, the continuation of zero hours contracts and proposed scrapping the ‘Working Time Directive.

  • Peter Martin 5th Sep '18 - 11:38am

    @ Jack Graham,

    “……..most people take out these loans out of desperation, and if it is made harder, it will just drive them to loan sharks.”

    I seem to remember from the days when I attended Sunday school a story of someone who was so incensed by the activities of money changers in a Temple that he threw them all out and overturned their tables.

    I suppose if he’d been of a like-mind to yourself he’d have left them alone on the grounds that needed to change their money and they’d get an ever worse deal if they went elsewhere!

  • @expats, I thought you were making honest, if not entirely fair, criticisms of Cable and the party in your post, right up until you claimed he was ‘enthusiastic’ about the cuts. This is pure hyperbole and undermines your whole credibility.

    One of my favourite LibDem things is our willingness to criticise our own, but it’s the job of the rival parties and tabloids to make stuff up.

  • Peter Hirst 5th Sep '18 - 12:00pm

    The thing is to make affordable loans to poor prospects conditional on some sort of money management course. Sometimes people do need short term loans to tide them over an emergency situation. It is usually those who are poor risks that need them. It is wrong to not enable them to access this loan but it must come with a procedure to make it less happen to recur.

  • nvelope2003 5th Sep '18 - 12:19pm

    expats : and look what happened to Wonga when restrictions were imposed

  • Fiona 5th Sep ’18 – 11:43am……………@expats, I thought you were making honest, if not entirely fair, criticisms of Cable and the party in your post, right up until you claimed he was ‘enthusiastic’ about the cuts. This is pure hyperbole and undermines your whole credibility…………One of my favourite LibDem things is our willingness to criticise our own, but it’s the job of the rival parties and tabloids to make stuff up……….

    What did I make up? I politely suggest you read the Guardian reports of 2010-12 and Vince’s U-turn statements on the need for cuts.
    To suggest that my remark on cuts negates my comments on tribunal fees, zero hours contracts and the ‘Working Time Directive is disingenuous to say the least.

    nvelope2003 5th Sep ’18 – 12:19pm………………..expats : and look what happened to Wonga when restrictions were imposed………….

    The ‘restrictions’ came into force on Jan 1st 2015; Wonga has just folded in September 2018. The collapse seems to have far more to do with its ‘unethical’ practices than any APR cap.

  • An outright ban seems extreme, though it is essential a cap on interest rates is maintained and probably decreased to lessen the pain extortionate rates can cause on those already often in financial distress.

    The next focus for regulation should be these weekly payment shops/websites which charge double or triple the normal price for an item, often hiding behind confusing advertising and contracts. Or Help to Buy, which is literally going to trap tens of thousands of people for years as house prices stall and the overvaluation of new builds and interest payments on the government share start to bite – but nobody really focuses on that one.

  • @Jack Graham

    “There are some people in our society who no matter how much money they are given, will remain financially incontinent. ” – this is very true. A friend of mine is a city lawyer earning well over £100,000 per year, and has on more than one occasion been known to run out of money before the end of the month and resort to payday loans to buy his round in the pub!

  • David Evershed 6th Sep '18 - 11:24am

    Please note that the official Annual Percentage Rate calculation has to include not only interest charges but also administration charges.

    The administration charge for a small loan granted over a short period produces a very high APR which is little to do with the interest charged.

    So charging £20 to cover the admin cost of lending £100 for a month roughly generates an interest equivalent of £20 x 12 = £240 pa on a £100 loan, an interest rate of 240%.

    Whilst an interest rate of 12% pa on a £100 loan for a month is just a £1 interest charge compared with the £20 admin charge.

    The inclusion of admin charges in the APR calculation was to discourage shadow interest charges being made through an ‘administration’ charge. However it also distorts the public impression of the interest rates that are being charged.

  • Martin Land 6th Sep '18 - 9:56pm

    I’ve never understood pay day lenders. Are there really that many people who don’t have a mate or a relative who can help them out?

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