The (Ir)responsible Practices of Payday Loan Companies

It’s the controversy that won’t go away – are payday lenders overstepping the mark to gain more business? And are young people becoming the most notable victims of their practices?

Today, two worrying stories have emerged about these firms – one concerns an advert encouraging people to take out payday loans over the Jubilee Weekend.

The other highlights the incredibly sad case of 18 year old Ollie Scott, who took his life after because of the huge debts he owed payday loan companies, including Wonga and Cash Genie.

His parents now believe there has to be a cap on the interest charged by payday lenders, as teenagers are now tech-savvy enough to find loans on the internet yet have little awareness of the potentially ruinous consequences of their borrowing.

So should payday lenders buck up their ideas? Here is the verdict from Alex Leigh, editor of the GLC Money Saving Blog…

I for one, have frequently found myself short of money in the past and sometimes needed to turn to a friend, family member or even my bank for a bit of extra cash until I was next paid. It used to be that if you needed some extra money, you’d simply have to borrow it from a friend or try and get an overdraft extension; however, it became apparent that there was a gap in the market for people who couldn’t do or just didn’t want to do either of these things. Almost everywhere you look now-days there’s a flurry of shops popping up on the high street offering short term loans, or as most people know them payday loans. The same is happening online, with various short term money lenders and brokers popping up where-ever you look (just check how often you see an advert for Wonga, or a similar company pop-up whilst playing Angry Birds!).

PaydayDrain_Iona

There’s a lot of bad press currently for this type of service, and it’s understandable why this is. I recently wrote an article where I tried to give a fair a balanced view on the service payday loans provide, but however you look at it, it’s clear that a lot of people are finding themselves in difficult situations from what may have started as a simple, small loan as a top up until payday. One obvious question is why people don’t use other, cheaper methods such as;

· Credit card cash withdrawal (usually at about 25% APR)

· Overdraft (Usually about 15% APR)

· Friends (Perhaps a pint??)

Many people probably do, but the most probable reason that lots don’t, is that these forms of credit are now more difficult to get hold of than ever; with tightened lender criteria and lower acceptance rates (even on credit cards designed for poor credit history), plus if you don’t already have a credit card, taking one out just for a short term bit of money seems a bit excessive and will probably mean you end up with more debt (if you use it once, you may very well use it again until you reach the limit). Options such as fixed term loans and overdrafts are also less accessible and don’t have the speed advantage of a “paid in 1 hour” payday loan. Friends are sadly, also unlikely to have as much spare money as they did a few years back.

All this restrained lending ultimately means that there are fewer places to turn. When you combine that with the fact that payday lenders are actually lending more money with easier criteria, then it’s easy to see why people turn to a payday loan. Growing competition in this sector (mainly due to the lower risk lenders expose themselves to by lending small amounts), also means that lenders are fighting a battle to make their loans more and more accessible.

For many people who seek a short term cash fix, they go into the agreement, hoping that it will sort their finances out, however, as we often hear, it can make things a whole lot worse. The circumstances that cause this are usually;

1. An individual needs some extra money but isn’t in a situation where they can borrow from a friend or their bank.

2. A short term loan provider who has “loose” criteria will accept an application from the individual for a loan until their payday.

3. When payday comes around, the individual doesn’t feel they can fully repay the loan and so carries the loan over to the next month. To facilitate this, the borrower will usually need to pay the interest accrued for the last month; however the capital of the loan will remain the same.

4. The borrower now has less money to last until their next payday (as they’ve had to pay their loan’s interest) and therefore cannot payback the loan the next month – this will then keep happening from month to month OR the borrower may decide to take out another payday loan to cover their shortfall. This is where things really get messy and the individual can end up in a great deal of debt.

“It seems that the marketing tactics of these businesses are aimed more and more at people who might clearly need or want some extra money, but may not be able to afford to repay it once they’ve been approved”

Now, it’s clear that people should have an individual sense of responsibility when it comes to borrowing money and perhaps “should know what they’re getting themselves into”, but many lenders don’t make this clear at the outset and seem to lend money to people who can’t really afford to repay it. The fact that some of these individuals are desperate for the cash, perhaps to feed their family or make other utility or debt payments, means that they may not think twice about taking out the loan if it’s offered to them on a plate (I know that in a similar situation, I’d be the same).

Earlier in the year, Wonga (who we’ll concentrate on here due to their prominence) were under fire for trying to advertise to students that their loans (which they don’t like to describe as “payday loans”, even though that is exactly what they are) can be used as http://www.bbc.co.uk/news/business-16520889. Although they may deny it now, to me, the marketing department that came up with that, are probably either slightly mad, quite daft or simply out to make money without any moral conscience (I’ll leave you to decide which one). After withdrawing the promotional page on their site, a Wonga spokesman said “We do not believe working, adult students should be excluded from a popular credit option”, so whether you take that as a valid argument or a bit of spin, is up to you. Personally, as they were never excluded from applying in the first place it seems to me like quite a detached statement to make.

Another “great marketing idea” has been the ‘refer your friends for £20’ scheme that Iona investigated. In this instance, customers are recommending their friends via. social media to get a loan, in order to get £20 credit themselves. In my mind, this perhaps seems like a small win if you end up getting your friend caught up in a payday interest cycle!

It seems that the marketing tactics of these businesses are aimed more and more at people who might clearly need or want some extra money, but may not be able to afford to repay it once they’ve been approved. Now, in my mind, this seems like an absurd business model, but perhaps because the loans are becoming so ingrained into our society, the businesses are simply trying to find further avenues and market niches in which to make money. It’s just a shame that morals and responsible lending practices in most cases seem to be taking a large side step in order for this to happen.

What is clear is that payday operators will continue to be in the limelight for their lending practices. More recently Wonga have started offering a business loan product. Although to some this seems like a product that could help businesses across the UK who are currently cash strapped, the concern has been raised about the rates Wonga are charging for this service, and there are fears that more expensive borrowing could become the norm as products like this become more ingrained into our society. The question is, are we happy to trade more accessible credit for higher rates with less apparent responsible lending practices?

Alex Leigh is the Editor of The GLC Money Saving Blog , writing about money management and giving his financial opinion. You can follow his blog posts on twitter.

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