Payday loans: helpful tool, or hopeless financial trap?
Would you rent a DVD if the rate on the sticker said “£105 per month” rather than £3.50 a night?
Or how about a hotel room advertised at £45,625 per year? Sound like a fair rate to you?
Both these options are a bit like taking a “payday loan“: a short term service where, if you write out the long-term costs, it looks a bit frightening.
However, there must be something about payday loans that’s either very convincing, or very necessary to a lot of people. Because despite advertised APRs of over 2,000 per cent, this form of borrowing is now four times more popular with the British public than it was four years ago.
Are payday loans useful financial tools for a short term fix? Or are too many borrowers getting sucked in to a dangerous cycle of payday-to-payday borrowing?
Payday loans: the figures, the facts…
According to research by Consumer Focus, the national consumer rights watchdog, there are now four times as many payday loans being taken out today than there were in 2006.
That equates to over £1.2 billion in gross lending. What’s more, the figures show that the number of loans is many times more than the number of borrowers — meaning that there are plenty of repeat users out there. Here’s how the figures looked in 2009:
- An estimated 1.2 million adults took out 4.1 million loans in 2009
- The average loan size was £294 (approximately 20% of the average household’s take home pay)
- Almost 70% of payday borrowers have household incomes below the £24,492 UK average
- The payday loan industry generated £242m in revenue last year—equivalent to around £20 per £100 in lending
And despite the increase in the size of the market, with many new lenders entering the business (especially online), charges seem to be increasing: from approximately £15 per loan in 2006 to £20 in this survey.
Is this rise just the beginning? The American market would suggest so, where payday lending is a lot longer established. A further half a million British adults suggested they might need payday loans over the coming years, suggesting the market could grow by a further 40 to 45% at least.
Can payday loans really help you keep the plates spinning?
Payday loans are intended only to be a stop-gap measure, yet more borrowers are taking out multiple loans. So these figures illustrate a growing dependency on unsustainable borrowing.
How can you make sure you don’t get into the trap of repeat payday borrowing?
- A monthly budget is absolutely essential. The best-managed family finances depend on them. The worst-managed rarely have them at all.
- If money’s tight this month, work out why. A change in patterns means a need to re-budget. Only a genuine one-off situation should justify a payday loan.
- If the situation occurs again, perhaps you’re not allowing enough headroom for the unexpected in your monthly budget: revisit your plan again, and try and make room for some savings Natwest eSavings
- Reduce your monthly outgoings if you can: for example, reduce your phone / broadband packages or switch to a cheaper energy supplier Energylinx
- Any expensive and ongoing debts such as credit cards should be switched to a long, low-rate balance transfer if you can Halifax All-in-one Credit Card
- If you’re genuinely struggling to repay credit, have you let your creditors know that? By all means do let them know—things will work out much better if you can renegotiate now, rather than face debt collectors later.
What are the alternatives to payday borrowing?
Or rather, what should the alternatives be?
After all, you can already get an overdraft with some bank accounts. But clearly this option isn’t available to all: it depends on how friendly your bank is feeling towards you when you ask. And just like payday loans, these are also subject to steep short-term charges if the overdraft is unauthorised.
• Should banks be required to offer all customers an ‘emergency borrowing facility’ that can be called on, say, a certain number of times per year to get us through tough weeks before payday? How should this be controlled?
• Should overdraft ‘penalty’ charges (i.e. for unauthorised borrowing) be stamped out altogether? Or would this just result in more bounced payments?
• Or should payday lending be restricted by the government, or even—as they’ve done in two US states—closed down altogether?
I, for one, hope that payday lending won’t be banned: this runs the risk of driving genuinely desperate people towards criminal lenders (“loan sharks”) with altogether different collection methods.
But if we can’t control the rise of payday borrowing, it could soon be trapping more and more families in a dangerous ‘spiral’ of borrowing that threatens only to lead to bankruptcy.
Have you had a good or bad experience with payday lending? Do you have an idea to share on how it can be avoided, or controlled? Post your responses, suggestions, and solutions in the comments box below.