Payday loans: missing the obvious?

Today the news has featured a bit of vox popping of people on the street about whether they would ever consider a payday loan. The story behind this is the Financial Conduct Authority (FCA) have proposed some measures, including “risk warnings” on adverts and capping loan roll overs to no more than twice.

Initially there has been a lot of brow furrowing and earnest head nodding about the proposals. After all pernicious lending with interest rates in the thousands of percentage points can’t be right can they? People should be aware of the rates, the debt risk and the actual cost before they get themselves into potentially expensive hot water.

Call me Mr Thicky from Thicksville but why don’t the government lower the temperature of that water by legislating a cap on interest rates for personal finance? We’re already in a position where interest rates are about as low as they can get but, even with the only personal debt in our house being our mortgage, we still get junk mail offering us credit cards at 27.9%. That’s a profit of around 25% but realistically when you’re looking at payday loans, the underlying profit, even given pretty high bad debt, is going to be astronomical. Wonga is making more than £1m a week in profit from people who cannot afford to borrow from conventional institutions.

Back in July, Consumer Affairs Minister Jo Swinson had a large number of payday businesses in to talk about responsible lending but refused to force them to cut their interest rates. Her reasoning? The vulnerable may be forced to doorstep loan sharks. Maybe somebody needs to remind her that a third of payday loans are taken out to pay off an existing payday loan. It’s a downward spiral to financial disaster.

Of course the vulnerable are increasingly vulnerable due to the all out war being waged on them by the coalition. The latest idea of stopping benefits for those under 25 will only increase the number of people living at their parents address well into their 30’s and ignores the fact that each year thousands of graduates fail to get anything more than temporary, shift, seasonal or part time work. The firm I work for isn’t huge but each year we take on one or two graduates and I must look through over 100 CV’s for each position. It’s mad, and something seen across all areas of life from the disabled to the long term unemployed.

So on the one hand we have benefits being cut or withdrawn on a large scale basis, and on the other we have legalised loan sharking allowed to charge thousands of percent in interest. MP Stella Creasey is a key supporter of the Sharkstopper campaign, something I’ve written about before, but there are other practical things you can do.

Before flushing your future down the toilet, seek proper financial advice. Yes, the government have slashed funding to the Citizens Advice Bureau (if I was a member of the tin hat brigade I might get suspicious at this) but you can start off at one of the increasing number of Credit Unions that are springing up to encourage local lending and saving in a responsible manner.

If you know somebody who might be thinking about a payday loan, please do tell them there are other alternatives.