Payday lenders cashing in on credit crunch

When we’re struggling to make ends meet, it is easy to turn to other methods of funding. This week, Debt Management Today explores the growing use of payday loans, and the effect they are having on the debt management sector as a whole.

With the payday loan industry worth an estimated £1.2 billion, according to the Mail Online, and growing fast, is it any wonder that increasing numbers of clients entering debt management plans have previously turned to payday loans in an attempt to get some quick cash?

Bev Budsworth, Managing Director at The Business Debt Advisor explained further: “We have seen a definite increase in debtors who have taken out payday loans – I think there has been formidable growth in recent times.

“We get a lot of people referred to us because they have been trying to get loans to pay off their payday loans but have been declined.

“People are not always cognisant of the fact that they need help and are just desperate to get hold of money as the payday loan creditor has their debit card and will take the money out at the end of the week or month, leaving them without enough money to live on.”

Vance Parsons, Director of EuroDebt, agreed: “With the rising cost of food, fuel and utility bills against stagnant wage inflation and reduced income due to a struggling jobs market, the wait for pay day can seem never-ending for families already under financial pressure. As a consequence, more and more people are being tempted by the offer of payday loans.”

This type of loan can seem very attractive because of the lack of credit checks, and for those heavily in debt the idea of paying back only a small amount at a time can appear to be the ideal situation. However, the cost can easily add up.

Vance Parsons continued: “We know that almost a quarter of people that come to us for help do so because they have got themselves into a spiral of debt, robbing Peter to pay Paul. As interest mounts, the debt spiral deepens. Payday loans just add to this misery as all too quickly the cost of the loan increases, making it difficult to withdraw from the agreement.”

A lot of debt management companies come across individuals with more than one payday loan. Bev Budsworth clarified: “More frequently, customers we help with debt management plans have at least two to three payday loans – however one of our clients has 13.”

So, what can clients do if they find themselves in a mounting spiral of loan debt?

She explained: “The individual has to cancel their debit card to prevent further money going out. They often need the help of an intervenor to sort out a managed plan so they can pay their debts off. It can take a while for the payday loan creditors to calm down and freeze interest and charges.”

The interest rates of payday loans are some of the highest in the industry. Barry Mitchell, owner of Recro Debt Management Services, said: “People get concerned with the high interest rates (APRs) but part of the problem is misunderstanding what payday loans are about.

“By definition they are short term loans for a 30 day period or less. All shorter period loans have a greater APR because the loan is designed to be paid back in such a short period of time. If, for example, you borrow £50 and the APR rate is 1734 per cent, after 30 days what you will be paying back is a total of £64.75.

“If you borrow the same £50 and the APR rate is 4214 per cent, after 30 days what you will be paying back totals £71.92 – only £7.17 more expensive. APR becomes a problem when people miss their due date for repayments, and that is when it becomes really costly.”

He suggested that there is a place within the industry for this type of loan, dependent on an individual’s personal circumstances. “One of my clients is a photographer and he called me up and said he needed £400 quickly for a camera in order to win and fulfil a particular contract. He knew he could pay it back straightaway, so in that situation I think a payday loan could be useful.”

Furthermore, according to payday loan company Instant Loans Direct, around 57 per cent of their customers are those who earn between £25,000 and £50,000 – significantly above the nation’s average wage. All that is required to be eligible for finance is a job and a bank account, which is why this type of short term funding is often so attractive.

However, Bev Budsworth highlighted that this kind of finance carries its own risks. “Payday loan companies are some of the most difficult creditors to deal with, because they are at the high end risk and lend when others won’t. We have seen some harsh debt collection techniques and sometimes we have to remind them of the OFT debt collection guidelines.

“We had one client who received an email informing her that the collectors would come to her home – which was a breach of OFT guidelines. However, some companies can be quite reasonable and will agree to payment plans.”

EuroDebt had the following advice: “We believe the best way to tackle financial difficulties is to take a long hard look at the total financial picture rather than just the monthly shortfall.

“Simple changes in direct debit timings can sometimes help and for those with more serious financial difficulties, negotiations should take place with creditors to agree a new repayment plan.”

Barry Mitchell said: “It does not matter what things cost, what matters is the benefit you derive by incurring the cost provided that, in the meantime, it is affordable.

“I don’t think the general public have a particular perception of payday loans, but suddenly they have realised that such a facility exists. However, in all probability, I think payday loans are perhaps more attractive to people without a financial understanding and who are perhaps more vulnerable, which is where there is a cause for concern.”

By Miranda Atty

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