Payday Loans: Unaffordable, Unsustainable, Under Scrutiny
It’s the beginning of November. Suddenly, shop windows are filled with tinsel, the high street resembles a chaotic free-for-all and the same festive songs begin to be played ad nauseum. Like it or not, Christmas is just around the corner, and with that, many of us are tempted (or forced) to overspend and overstretch our finances. With parties, dinners and gifts to pay for, we may wake up on the other side of New Year with a nasty financial hangover. This can be compounded by entering into credit agreements with high APR percentages, unfair repayment amounts and hidden charges.
In the wake of recent news that payday lender QuickQuid entered administration on 25th October, many are again debating the relative ease with which credit can be obtained from payday lenders, whilst “traditional” financial lenders such as banks and building societies are unwilling or unable to lend for regulatory reasons.
These institutions often have strict guidelines on who can borrow, taking into account their ability to repay. So, the alternative for many is to reach out to easier-to-obtain payday loans, with higher rates of interest, resulting in a much larger long-term repayment. Many of these solutions are problematic and cause those already in debt to become even deeper embroiled in the cycle of further high interest, borrowing to meet loan repayments and other monthly commitments.
The Competition and Markets Authority
The CMA published their ‘Payday Lending Market Investigation’ in 2015, which outlined startling findings in relation to payday loans.
This gave a crucial insight into the payday loan market, highlighting that 53% of payday loan customers included in the study indicated that they used their loan for living expenses (such as groceries and utility bills).
The same study asked whether payday loan customers had experienced any financial difficulties or credit problems in the last five years. The study found that:
- 38% of customers reported a detrimental impact upon their credit rating
- 35% had made arrangements with creditors to pay off arrears
- 11% had experienced a county court judgement
- 10% were visited by either a bailiff or debt collector
In fact, a total of 52% of customers surveyed as part of the investigation indicated that they had experienced one or more of these debt-related problems in the last five years.
As these issues are reflected on credit records, the ability to obtain credit with more competitive interest rates has always been difficult, particularly with high street lenders. As a result, many individuals turn to payday loans as a way of making ends meet.
Vicious cycles of borrowing
Callum spoke to consumeradvice.scot about his experiences with payday lenders after being refused a personal loan and credit card with his bank due to not meeting the affordability criteria set out in the application process.
“My wages have always been lower than my friends. They can go away for weekends and holidays without as much thought about the costs involved. For me, having to save for these luxuries, whilst paying my monthly bills means making a lot of sacrifices and living cheaper.”
Callum discussed the cycle of borrowing to repay his existing commitments and how this impacted upon his situation for months at a time.
“I’d paid the flights and accommodation off by saving, but the spending money was a struggle for me…Ibiza isn’t a cheap place to go to and I borrowed £800 for the week. It was all very well and good at the time of the holiday, but the following month the realisation hit me that the monthly repayments were so expensive, almost £270 per month, and in the long-term, paying back almost double what I had borrowed when paying this over 6 months.”
Callum had to take out another 3 payday loans to make the monthly commitments and quickly found himself digging deeper into debt. It was only by understanding his rights as a consumer and understanding that the payday loan company should not have originally authorised his loan that he was able to take back control.
Best Practise and the Consumer Recourse
The FCA has published their ‘Good Practise Customer Charter’, which sets out rules that payday loan companies must follow, which states that the payday loan company is responsible for ensuring that the affordability of any loan is assessed, including any potential customer’s financial situation and personal circumstances.
When a customer is unable to realistically pay back the loan at the time it is taken out, then the company should refuse the application. The rules are established so that lenders should also inform applicants that this method of high-interest borrowing is not intended as a long-term financial solution and that customers should not be entering into an agreement for such a payday loan if they are experiencing financial difficulties.
By writing to the lender, advising them of the facts and outlining what the customer would like the payday lender to do about this, they may be able to get interest on existing loans frozen, or alternatively, be able to repay the balances over a longer period of time.
In this situation, the lender is required to respond within five days of receipt of the letter, acknowledging the complaint and advising what the next steps in the process will be. If further response is not received within eight weeks, then a complaint can be made to the Financial Ombudsman Service (FOS), advising that a satisfactory response has not been received from the payday lender within the outlined timescales.
Callum used this process in order to regain control of his finances, allowing him to clear loan balances over a longer period-of-time. However, there are still so many of us out there who aren’t aware of the implications of high-interest borrowing and what rights we can exercise.
With many customers and former borrowers of payday loans now finding the ability to claim back the exorbitant interest that they have lost to these payday loan companies, never has it been a more appropriate time to take a step back and assess the areas of our busy and expensive lives that can be trimmed, in order for savings to be made.
Living within our means is an important step in ensuring that we don’t get in over our heads, and although it is a cliché, by looking after the pennies, the pounds really do take care of themselves.
At consumeradvice.scot we wanted to offer our top tips for budgeting more effectively, without having to resort to expensive forms of credit like payday loans this festive season.
- Plan meals and save pounds – By planning meals in advance and writing a shopping list before going to the supermarket, you can avoid waste and the purchase of unnecessary items.
- Credit Unions care – A loan from a credit union can be much cheaper in the long-run than a payday loan. Save to borrow and borrow locally.
- Compare prices and shop around – The increasing cost of living is one of the biggest costs that encourages people to take out payday loans. Shop around for things like energy costs and mobile phone contracts and remember to switch to better deals when they become available.
- Remember it’s the APR % that stings and not the monthly payment – Higher rates of interest (APR %) can be what cost more in the long run. Remember to compare interest rates as opposed to the monthly repayment amounts.
- Sleep on a purchase – Remember that impulse buys and items that are unnecessary can seem less appealing in the morning. Consider expensive purchases for longer and ask yourself if you really need them.
If you would like more advice on any consumer matter, you can contact consumeradvice.scot on 0808 164 6000. We are open 9am-5pm, Monday-Friday. You can follow us on social media – Twitter: @advicedotscot and Facebook at www.facebook.com/advice.scot, Instagram: @advice.scot, or get ahead by visiting our knowledge centre at www.consumeradvice.scot.