Payday loans - submission to Office of Fair Trading consultation

Introduction

Taking into account the fact that wages have been frozen in many sectors, unemployment is on the increase and the cost of living increasing all the time it is of little wonder that more and more people are turning to quick-fix loans.

On the floor of the Senedd (National Assembly of Wales) I put forward a motion that noted the increase in the number of high interest payday loans being taken out and the increased ease of access to such accounts. It called for the government and local authorities to work with the third sector to offer viable alternatives to such companies and to alert citizens to the real cost of the loans offered. The motion got cross-party support and was carried unanimously.

Background

In my work with with advice groups it had become clear that the number of cases of people taking out payday loans has increased. The CAB notes that nationally some 4% of their debt clients now have payday loans, compared to 1% in early 2009. Here in Wales, in 2010-2011 Powys CAB negotiated nearly £9million of debt on behalf of clients. A third of this - £2.7 million – was unsecured personal loans.

There is also an increase in the number of people using payday loans to pay for other loans and to deal with financial difficulty they are already experiencing. Due to the high interest rate of payday loans there have been cases of people taking out multiple loans, suing one to pay for the other, ending with their debt spiralling out of control.

The CAB have noted that they have had cases where people come in, and they have paid off a payday loan with another payday loan, one man found himself with six loans and owing close to £4,000.

CAB notes that 40% of people coming to them with payday loan debt have another high-cost credit loan and on average, those with payday loans tended to have eight loans in total while those not using payday loans had a total of five debts. It seems therefore that that people facing long-term financial difficulty with other debs are more likely to take out a payday loan to try and deal with these problems.

Marketing of payday loans

It is easy to come across advertisement of such loans they feature on peak time commercial breaks on some of the most watched television programmes and are seen by many on social networking sites, including young people.

All these advertisements highlight how easy it is to get hold of a loan, how quickly the money will be in the bank and the amount paid back is mentioned in £20s or £30s, making it is hard for the consumer to see the true price they are paying in APR. The emphasis is on convenience.

On website advertisements rates of payback are not always advertised clearly but are only available to see in the frequently asked questions section, a practice that is against all guidelines but is commonly seen in the industry.

On social networking sites, advertisements specifically target young people. Early in 2012, one well known lender came under criticism from the National Union of Students following its advertising of loans specifically for students.

On its website Wonga was found to say that official student loans had the potential to get students in more debt than necessary, though those loans are offered at 1.5%, a fraction of the percentages of APR offered by some of the biggest and most advertised lenders. The most well-known lenders charge 3,113% (Ferratum) and even 4,214% (Wonga) APR, which can mean that 60 times the original amount borrowed is paid back.

The comments from the lender were withdrawn following criticism but students have a union to protect them. There is little to protect the most vulnerable in our communities facing a gas bill and with access to a smartphone but not a bank lender.

These advertising practices have come from North America and regulation of lenders varies from state to state. However here in Britain regulation has not changed in line with the changes in the use of such loans, and especially regarding the unfair and misleading nature of advertising and lending.

I am particularly concerned at the promotion of payday loan smartphone apps, which make no mention of interest rates during the installation process.

Irresponsible Lending

Not only are loans unfairly advertised but they are given to people without correct and sufficient checks on people’s ability to pay them back with regard to their salary, means and circumstances. It seems that even when lenders know that applicants for loans are unemployed the loans are still provided. This is a situation that does not make sense.

An unemployed West Wales man applied online for a payday loan whilst under the influence of drugs and was given a £650 loan. He was unable to pay this back and the debt grew to over £1500 with interest amounting to approximately £8 a day.

A young couple in South Wales were struggling to maintain their mortgage and other priority debts and took out five high interest loans. Due to long term ill health and unexpected illness both parties lost income and began having difficulty in meeting repayments. Incurring very high interest from these lenders added to the stress both parties’ currently poor health. Had proper assessments of the client’s financial circumstances been made it would have shown that they would not be able to afford the repayments and therefore they should not have been given the loans.

Unfair debt collection practices are also commonplace, giving no regard, it seems, to personal circumstances and problems as well as changes in circumstances.

A South Wales man had taken out a succession of payday loans. The term of the loan was repayment with interest within 31 days. He became unable to repay the loan and called the lending company to inform them he was having financial difficulties, specifying priority debts, including maintenance for his ex-partner and young children. He was told to call back in three weeks when he should make a new repayment arrangement. When he did call back he was told it was too late, money had already been taken from his account and his account had been emptied of £814. As a result he could not meet any of his priority financial commitments – including food for his children fuel bills and rent bills.

It is all too easy for the loans to become available to people, within a short space of time money is transferred into people’s bank accounts without enough though given to the ability to pay back the amount borrowed.

Widespread impact

Although loans are more traditionally associated with those who are unemployed or in low-income jobs, the downturn in the economy has led to more and more people in other groups within society coming forward with debt problems having taken out payday loans.

Ceredigion CAB has noted an increase in people beyond the ‘financial inclusion’ group coming to them for advice on payday loans. They also note that this has meant there are fewer resources available to deal with the increased number of cases.

A local group in Llanelli serving a Communities First area with a project specifically to deal with debt problems have said that more and more people are coming to them and that many are from groups that do not fit into the Communities First criteria. They note that they are “getting to the point where we might have to see only people from Communities First wards, whereas at the moment we don't turn anyone away.”

We could see a situation where people not traditionally considered to be most in need will lose out and won’t have anywhere to turn.

Lack of financial education

Added to this is the lack of consumer awareness and money-management skills taught in schools. In the long term this problems needs to be addressed in order to increase the awareness of lending and borrowing that should lead to a decrease in the number of people being taken advantage of and preyed upon.

A way forward?

Most people turn to payday loans or unsecured personal loans after being refused a loan by banks, and feel they have nowhere else to turn. People need to become more aware of the other options available to them. Take for instance Credit Unions and initiatives that lend money to disadvantaged people. Worldwide there are 49,000 credit unions in 97 countries serving 184 million people. Wales’ 22 credit unions, currently offers support to 42,000 people but they must be given support by public bodies to reach those in need of their help.

Moneyline Cymru is another example of such a scheme, backed by numerous housing associations and lending £3.625m to customers who would not be able to access loans from mainstream banks, at a low interest rate. They estimate that through their work they have saved £2.18m of debt interest. They also encourage customers to save and provide savings accounts to enable this as well as providing a money and debt advisor to all customers. This can only educate people and ensure that they are not trapped in debt but can move themselves forward.

In the short term people need to be made aware of the practices of these lenders but in the long term people need to be educated in order not to fall prey to lenders offering a quick fix with unknown consequences.