Much attention is being focussed in the media, government and regulatory circles about the vast growth in ‘payday loans’. Experienced debt counsellors are predicting an increasing rise in repayment problems due to rapidly mounting debts caused by the huge APR rates applied to these loans.
Payday loans are ultra short-term but expensive lending for those who exist on a hand to mouth basis. Emanating from America, they are heavily marketed through TV advertising and even unsolicited text messages to the vulnerable.
As initial loans tend to be modest (except to the borrower), insolvency practitioners (IPs) are as yet unclear of payday lenders attitudes to bankruptcies and IVAs. most of the consumers in financial difficulty who are likely to purchase payday loans are unlikely to have the wherewithal to propose an IVA.
But, most IPs do provide an informal service to this part of the market, even if it is simply helping debtors to find the local bankruptcy court. Most of us have concerns to educate those who we find unable to manage their finances.
Apologists for payday loans, such as John Lamidey of the Consumer Finance Association, which represents payday lenders, regularly defend the product. In a recent article in Credit Collections & Risk magazine (January 2012), Lamidey stated: ‘there is a plethora of inaccuracies surrounding many of the industry’s responsible businesses’.
In contrast, these are my own observations.
- Payday lending companies make serious money from consumer borrowers, who are made up of people who can least afford it.
- Payday lenders compare their rates favourably to that of an unauthorised overdraft. Surely an “unauthorised” overdraft is borrowing from someone who hasn’t agreed to lend? That’s not too far away from stealing!
- Lamidey defends the claim that the payday market is unregulated by providing a long list of regulations that he claims apply. None are specifically aimed at payday loans. I believe the issue is not market regulation; it is the easy availability of a product, which can cause much future misery.
Lamidey suggests that without the availability of payday loans consumers would have: ‘lower living standards if they cannot manage their personal cash flow by smoothing out the peaks and troughs of income and expenditure’. This is the crux of the problem to which payday loans should NOT be the answer.
I suggest the ‘need’ is for consumers to be taught how to manage their money, a skill that seems to have been forgotten. Being of a certain age, I recall the time when there was no consumer credit and one managed one’s money by putting something aside for the rainy day.
We no longer seem to educate people as to this desirable trait. I do not believe that there is any god-given right to borrow money. I think we might see fewer financially stressed consumers if they realised this.
We have seen the rise and fall of credit cards for all and the wringing of hands about those who borrowed way beyond any ability to repay. Payday loans are targeted at those who can least afford them. Unless there are controls over this type of lending, we are going to see increasing stories in the media of suicides or criminal behaviour by those who cannot cope.
Being realistic, I guess expensive payday loans are probably here for a while. Ideally I would like to see government health warnings akin to cigarette sales. Or better still, wouldn’t it be a nice if Consumer Finance Association members devoted say 10% of their significant profits towards educating customers in how to manage income and expenditure, so as to avoid the needs for such lending?
I think the education of Income and Expenditure, should be taught from a younger age, i.e. at least at some point through secondary high school years. I believe that there is a petition being pushed to government for the education of money and how to handle your own finances, to be introduced to all secondary schools across the UK. I am not sure if this has reached an outcome yet, but one that should definitely be taken seriously! Sometimes I think it is too late to educate some people who are already caught in the “trap” of over spending and borrowing, it should be brought back a level to educating school children for the future. – I have to say, at school had they have had lessons of this nature, I may not have welcomed it at that age, but I would certainly be reaping the benefits from it now at an older age. Fortunately for me, I have come from old fashioned roots, so was well educated by my parents! Something that not all kids get these days….