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NIPSA Youth E-zine January 2013

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Payday LoansWhat’s the problem?

Kris Bailie (NIPSA Youth)

Nestled deep within the beast that is rising unemployment, rising living costs, house repossession, fuel poverty,

frozen wages, malnutrition and ill health lies a dark, relentless and powerful heart: payday loans.

Long-term unemployment among young people has almost doubled since 2008.1 As we head towards becoming the poorest youth for generations, we find ourselves financially desperate, with a banking industry that has cut us off from credit like an engorged suckling. Cue an alternative saviour targeting the financially starved young with offers of “help”: payday loans companies.

The most high profile of such companies is Wonga. Wonga states that its client base is made up of “the ‘Facebook generation’ – the couple whose boiler breaks at 7pm, or the teenager who has to find money for a Glastonbury ticket”.2 These companies host shiny, catchy advertisements and market their loans as being able to casually and transparently help you with

your mortgage or utility bills to gently get you by until payday. Countless foreign and home-grown payday loans companies currently operate in the sector. However, they distort this great financial feast by offering people on below-average salaries small loans of around £400 over 30 days, with anything up to a monstrous 5,000% interest. Although consumer credit regulation says that no unsecured loan should exceed £25,000, there is no control on how much interest a lender can charge.

How do we know payday loans are uncontrollable?

● The UK lending and pawnbroking industry, worth £100 million in 2004, is now said to be worth between £2 billion and £4 billion

● Figures 3 for people calling the National Debt Helpline have increased tenfold in the past two years

● The majority of people4 who took out a payday loan have regretted the decision afterwards because they are so damaging to a person’s long-term finances

● Moneyexpert.com calculated that if you borrowed just £100 from Wonga at its APR, after seven years you would owe more than the US national debt (scroll down)

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For any sane person, it is obvious that this is wrong. We need to do what we can to stop excessive profits being made on the back of people who struggle to get to the end of the month. We need better regulation and interest caps, and companies must not be allowed to add further burdens, such as charging administration fees.

● Avoid these companies and spread the word to friends

● If you must take a loan, join your local credit union, where borrowing rates are relatively low

● Write to your MLA with concerns about these loan sharks in your area

● Join existing local campaigns to end legal loan sharking

● Write to your local payday lending shops to insist on clear debt advice and alternatives for customers

Consumer credit providers are regulated by the Office of Fair Trading (OFT). The OFT is due to open an investigation next year into companies holding consumer credit licences, to ensure that they are only given to and held by companies that are “fit to hold them”. However, that will not alter the lack of limit on interest charged. Wonga’s business model would be illegal in some countries, but due to the lax legislation in the UK these practises will go untouched unless we take action. Refrence: 1:DEL/DSD 2: The Observer, Sunday 16 October 2011 3: Joanna Elson, CEO, the Money Advice Trust, 4: Research by R3

What can we do?

Anonymous

A Wednesday night in June 2010. My partner and I were flicking through loan sites, hoping to pay for a bit of decorating and maybe a holiday. We estimated that anything between £1,000 and £1,500 over 12 to 18 months would be fine. Neither of us had fantastic credit rating — truth be told, they were abysmal due to frantic overspending in our late teens — so we looked upon this venture with a certain pessimism.

After a few hours, we gave up, as we were constantly redirected by companies to their sister companies, which offered us very small, very short-term loans. We went to bed that night not overly annoyed, as the websites had just confirmed what we had already assumed. However, the next day we were bombarded with

calls, texts and emails from “financial institutions” offering us various forms of credit. We managed to ignore those, until one month, when we were stony broke, an email from Payday UK popped up. I looked at it for quite some time, then took the plunge. The next day, I had £200 in my account ready to use. Payday came and went. I paid my loan in full. All was well with the world.

I’m afraid not. You see, what most people fail to realise is that when you do pay off these loans it leaves an even larger hole in your pay packet than your initial deficit. But there was a way out. Payday UK phoned to inform me that as I had proved a reliable customer my credit limit had been raised by £165. Would I care to avail myself of this new limit? (scroll down)

Payday LoansTheir part in my downfall

Like any other broke idiot, I jumped at the chance. I now owed Payday UK almost £500, around 60% of my monthly salary. Before long, I realised that I wouldn’t be able to afford to pay that at the end of the month. I phoned Payday UK. It informed me of its rollover system, where I would just pay the interest and the balance would rollover for another month (whilst taking nothing off the balance itself ). This turned out to be my downfall. Once I was aware of this safety net, I let the debt rollover and rollover. I found myself looking for a crisis that required money, and taking out other payday loans just to boost my rapidly dwindling disposable income. Within eight months of taking out that loan, I had the following payday loan debts to my name: Payday UK (£455), Wage Day Advance (£500), Payday Express (£400), The Money Shop (£312.50), Cheque Centre (£350), Cash Converters (£1200), 1 Month Loan (£392.50). Total debt: £3,610. Total amount to rollover each month: £902.50, basically my entire monthly salary.

This jolly dance between me and my creditors went on for slightly over a year. Occasionally, I would pay a little off the balance with some back pay or a few extra pounds I had squirrelled away. But it was inevitably borrowed again, plus a bit more. For almost two years I kidded myself that

some miraculous financial gain would clear all my debt. It never came.

Things came to a head in September 2012, over two years after my first loan. I suddenly realised things were never going to get sorted if I just waited around for it to happen. I got proactive, and set up a debt management programme with a reputable company that came recommended from friends. At this point, all possibilities

of getting a consolidation loan or any other form of credit were gone. Debt management doesn’t help my credit rating, doesn’t write off any of my debts and doesn’t let me off scot-free. It does mean that I have money to live on. It does mean that I can sleep at night. I’m not by any stretch advocating that everyone should go into debt management. However, because of payday loans, it became my only option.

Before you type Wonga.com into your computer or walk into The Money Shop, debit card in hand,

remember my story. I got one payday loan for one month in June 2010. It will last until September 2014. That one-off one-month loan has cost me around £22,800, made up of £900 rollovers for approximately 20 months, plus £200 for 24 months through debt management. It is a vicious circle that can turn into an addiction as easily, in my opinion, as alcohol or gambling.

We must all be careful.

Undoubtedly payday loans pose the threat of magnifying a shortfall in your income… If managed incorrectly, these debts can spiral beyond all control, as clearly indicated by the above case study.

However, what we must understand is that we must try to live within our means, ultimately achieving this with a solid budgeting strategy.

Ask yourself the following questions:

1. Do you spend more than you earn?

To answer this you need to understand what exactly you have incoming and outgoing on a month by month basis.

With credit so readily available we often overlook budgeting; in fact many of you may have never attempted to budget before.

Allocate all your outgoings into three categories:

● regular commitments (such as mortgage payment/rent);

● day to day expenses (such as food/entertainment);

● occasional expenses (such as car repairs/birthday presents).

It’s very easy to overlook ad hoc withdrawals from the cash machine. So, for at least one month, commit to accounting for every penny you spend.

2. What can you afford to spend?

Now you have a clear idea of where your money is going, it will be easier to identify areas where you can cut back. By reviewing what you pay for current expenses – such as phone bill, broadband and utilities – you can make substantial savings.

This can also be applied to existing insurance policies; for example, for your home and car.

Once you have trimmed back your expenses, be very mindful about your actual spending. Sometimes it’s advisable to withdraw only what you need on a week by week basis. This means you can see exactly what you’re spending and what you can potentially do without.

3. Have you protected your income?

Once you have your spending under control you might want to consider the possibility of protecting your income, and your family, should anything happen to you or your ability to work. Protection may provide a safety net in the event that life throws a curve ball. Life insurance could potentially cost less than mobile phone insurance!

Payday loans can open a vicious debt cycle, and affect your credit history in the long run. Sometimes a simple budgeting exercise can reveal obvious gaps in your money management. For example avoiding a takeaway coffee every morning could potentially save you £50 per month. Budgeting lies at the foundation of every financial plan whether you are living from one month to the next or you are earning a six-figure salary!

Platinum financial planning are NIPSA’s appointed financial advisers, specialising in pensions, protection, mortgages and investments.

All NIPSA members are entitled to a complimentary initial consultation. Call us on (028) 9065 5305.

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Views expressed in this Newsletter are not, unless otherwise stated, the views of NIPSA.

Beware the Payday loan