Skip to main content

PAY DAY LOANS - IS IT TIME FOR AN ALTERNATIVE?

There has been increasing concern regarding the growth of so-called payday loans i.e. small, short-term unsecured loans where both the principal and interest scheduled is to be repaid on a single date.

They are generally used by those who cannot obtain credit from mainstream funders such as banks and, as a result, the businesses who provide such facilities have been accused of  preying on the most vulnerable in our society who have little option but to go to such lenders for financial support.

Whilst the sums borrowed are not high individually, the amount of interest paid on such sums are perceived as extortionate. For example, the Office of Fair Trading has estimated that the average payday loan is around £270 for 30 days, with interest ranging from around £15 to £35 per £100 borrowed for one month. This, in annual percentage rate (APR) terms is equivalent to between 448 per cent and 3752 per cent.

And whilst companies such as Wonga have been accused by the Archbishop of Canterbury of being legal but not ethical or moral, there is little doubt that this is big business for these firms. Indeed, over 12 million short term payday loans were arranged in the UK in 2012, equivalent to around £3.7 billion of credit, with those borrowing paying over £900 million in interest and charges.
So why have such businesses grown?

According to a recent report from the accountancy body ACCA, this is down to a combination of factors that are a direct result of the financial crisis of 2008. Falling real incomes have created demand for short term loans and, because of the lack of appropriate regulation and restrictions by traditional lenders on unsecured borrowing, this demand has been met by new entrants into the market which are able to offer loans quickly to potential customers. Indeed, approval by online lenders can take as little as fifteen minutes.

Perhaps it is not surprising that with Wonga claiming it turns down a high number of applications for loans, payday lenders seem to be making their revenue from so-called rollovers, so when a borrower cannot repay a loan at the end of the month, this is then extended until the next payday with additional interest and charges.

As a result, some individuals can remain stuck in an increasingly expensive circle of debt as the costs of servicing the original loan go up every day. A report from the Office of Fair Trading found that one pay day loan borrower had rolled over the same loan 36 times.

In fact, whilst £900m was spent by borrowers on payday loans in 2012, half of this came from rollovers. It is therefore not surprising that many are concerned that the business model adopted by the main payday lenders of focusing on repeat borrowing is failing to deal with some of the deep-rooted problems of indebtedness within parts of our society and,in fact, are exacerbating them.

With money flowing out of poor communities into these businesses the ACCA argue that not only would many payday borrowers clearly have been better off without these loans but as they are consumers, local economies would also have been given a boost if the money spent on servicing high interest loans would have been spent in their local communities.

The recent cap on borrowing on payday loans proposed by the Financial Conduct Authority will undoubtedly help deal with this issue but surely there needs to be greater innovation to deal with the problem of the lack of access to borrowing facilities by the poorest members of society?

Arguably, part of the problem is that the financial services industry seems to have reluctantly accepted that with mainstream lenders moving away from what they consider less profitable groups within their portfolios, payday lenders are the only alternative in providing access to capital for the most marginal in our society.

Is that acceptable?

There are signs that some payday lenders have changed their approach to minimise their costs so that the cost of borrowing is lower - but perhaps a wider solution is required.  Certainly, the potential of credit unions to support the financial needs of the communities in which they are located has yet to be properly realised, especially in Wales.

In addition, there have been calls for charities to team up with banks to benefit from their infrastructure and economies of scale to deliver low cost loans to those that the mainstream lenders would normally turn down. The Welsh Government has also examined the potential creation of a publicly-funded Community Bank to help serve lower income individuals.

So there are alternatives that should be considered to the current situation and with the Church of England now stating that they want to support an alternative to payday lenders, there may finally be an impetus to ensure that those on the margins of society get access to the affordable loans that most of us take for granted.

Popular posts from this blog

THE CRACHACH

Unlike me, do you consider yourself part of 'the establishment' here in Wales?  As thousands gather for the Eisteddfod in Mold this morning, they will, according to some social commentators, not be participating in the greatest cultural festivals of Europe. Instead, they will merely be bit-part players in one of the annual gatherings of the great and good of Wales.  Unkindly, this set of the movers and shakers in Welsh society is known as 'the crachach' , and constitute a social class all of their own, dominating the educational, cultural and media sectors of Wales and allegedly looking down upon any outsider with new ideas, reinforcing mediocrity and failing to see beyond the limits of their own narrow experience.  They are said to live in a comfort zone that awaits the expected invitation to the next glass of chilled chardonnay and canapés, forgetting that due to their lack of leadership and drive, Wales remains firmly rooted to the bottom of the UK prosperity league ...

THE IMPORTANCE OF THE CREATIVE CLASSES

One of my favourite academic books of the last two decades must be the “Rise of the Creative Classes” by Professor Richard Florida.  This was one of the first detailed studies of the growing group of individuals who use their creativity and mental labour to earn a living and not only included those in arts and entertainment, but also people working in science and technology as well as knowledge-based professions such as healthcare, law, business, and finance.  Fast forward to 2022 and Professor Florida has written an updated report on the creative classes although he and his team now identify a different type of individual who is taking full advantage of the growth in digital platforms, social media, and online marketplaces.  Such ‘creators’ are defined as those who use digital technology to make and publish unique creative content, whether in the form of video, film, art, music, design, text, games, or any other media that audiences can access and respond to.  They ...

THE IMPORTANCE OF FRANCHISING

When we talk about start-ups and entrepreneurship, rarely do we discuss the potential of franchising not only as a way of establishing new ventures in the economy but also as a method of growing existing businesses. According to the British Franchising Association, franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor. The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. This enables individuals to start their own businesses without having to develop their own ideas and utilising an existing brand and established market. Of course, whilst each franchise business is owned and operated by the franchisee, the franchisor controls the quality and standards of the way in which the business is...