How payday loans have distorted our society

 They say (whoever they are) that whatever happens in the US follows over in the UK a little later on. This is true of many events and certainly the effects upon society by the availability of payday loans, new financial legislation and the growth of the loan shark market, proves that society has changed during the past deep recession years – and may never return to its former status.

This special report compares how society has changed since the days before the recent recession, when short term loans were often used and required, but have increased significantly since advertising informed more people about their existence. The number of illegal loans may not have changed considerably during the before and after period, but the total amount of business has increased rapidly as more people were forced into the need for a payday loan.

It is the adverts that brought payday loans into the minds of people who had heard of loan sharks, but didn’t come into contact with the need or people involved before the recession. For those who sought illegal loans before the recession, nothing much has changed or is likely to.

banks closed for business to customers in need of a loan

History will show that the banks closed for business during 2007 and stopped lending money to people who needed it. This was is contrast to the previous years where almost anyone with a forged payslip could organise a bank overdraft and a few credit cards in a matter of hours. The banks lent money without full checks and control over whether people might be able to repay the debt or not. Subprime mortgages (where the home owner self declared their income and therefore, the size of their mortgage – which is unrelated to whether they could afford to repay or not) were the envy of many mortgagees, until the bubble burst and homes were placed in jeopardy.

Whereas individuals would have turned to friends and family, bank overdrafts or loans, to help them get through an emergency financial cash flow, after the bank reduction of availability of this money from individuals or organisations, payday loans came into their own. The consumer focus is more on the availability and speed of the loan, compared to the overall cost and most people won’t shop around for a loan. Most do not even realise that you can compare deals between lenders, which means that lenders have a much reduced incentive to compete on the best price.

Individuals are caught in a loan trap for much longer than expected, when they take out their first payday loan, often because they find the fees and charges and anything connected with partial or late payment increases the debt considerably and makes it impossible for the debt to be cleared by the following payday, beginning the cycle of longer and more costly loans.

after the bank and mortgage collapse

After Lehman Brothers Bank went under, the Federal Reserve and the United States Treasury nationalised Fannie Mae and Freddie Mac, the largest mortgage companies in the US. They also took over the largest insurance company, AIG. Suspect lending practices placed many individuals into a difficult predicament as high numbers defaulted on their mortgage payments. [1]

Canada entered the recession by the end of 2008, with Latin America joining in 2009, along with the UK and many other markets across the world. The UK felt a double dip recession between 2011 and 2012 resulting in unemployment levels reaching 2.6 million people. These time periods matched the growth in payday lending in those countries. Once the initial payday loans sales bubble began to burst in the US, and as legislation slowed business, lenders looked to other countries to make their money and grow. [2]

Throughout the recession, banks in the US and then the UK re-evaluated their lending criteria making it difficult, if not impossible, for poorer and middle class individuals (earning under £30k a year) to gain or continue an overdraft facility with their banking provider. The possibility of raising mortgage money evaporated overnight as new criteria developed, providing hope only for those with secure employment and a perfect record of repaying previous debts.

The Community Financial Services Association of America (CFSA) reported in 2010, that; “Those who use payday loans have limited alternative sources of credit, such as pawn shops, bank overdraft protection, credit card cash advances (where available), and informal lenders. Although expensive, payday loans are less expensive than available alternatives.” [3]

Payday loans have become a way of life in the UK. From around 19,000 payday loan adverts in 2009, almost 250,000 adverts appeared in 2011 increasing to almost 400,000 adverts in 2012. Over 50% of advertisements are seen on television between 9:30 AM and 5 PM, 25% of adverts shown between 5 PM and 9 PM.

To put these figures into context, during 2012, the 397,000 advertisements casued 7.5 billion impacts for adults and 596 million for children.[4]

  • This is the equivalent of an adult seeing 150 payday loan adverts per year
  • 70 payday loan adverts being seen by the 4 to 15 age group

Customer profile

The customer profile in the US is very similar to that of the UK. There is a complete misconception that consumers of payday loans are unable to obtain bank accounts and are likely to deal purely in cash. This is entirely incorrect because 100% of legal payday loans are repaid via a continuous payment authority (CPA) which is linked to a bank account.

Nevertheless, the analysis of consumers that are attracted to the speed and efficiency of payday loans show they are usually under 40, have a low income, very little in the way of assets and have already used every other line of credit available in the circumstances.

A lack of price competition sets the market rates for payday loans. Its typical consumer borrows around £270 and intends to repay the debt in three weeks. The average consumer takes out six loans per year on average. Statistics by the Government show [5]

  • 38% of payday loan customers had a bad credit rating
  • 35% had made arrangements with creditors to clear the arrears
  • 11% have County Court judgements (CCJs)
  • 10% have been visited by bailiffs or debt collectors
  • over 50% of consumers had experienced one or more of these problems in the past five years
  • 66% of customers clear their debt in full on or before the target date
  • 80% of customers take out further loans within a year
  • 40% of customers use at least two different lenders

The Citizens Advice on Law Centre claimed that 76% of clients may have grounds to make an official complaint to the Financial Ombudsman Service. 20% were possible cases of fraud, including where lenders would chase the loans customers hadn’t taken out. 33% of people had complaints about continuous payment authorities; 12% felt harassed and pestered by lenders, while 10% of people were perhaps unfairly treated by the lenders.[6]

According to The Competition and Markets Authority, (CMA) for people who struggle with these (effectively) small loans, they are overpaying around £45 million a year, which is hitting the poorest elements of the UK’s society even further, just at a time when they are in need of a low-cost loan, but lenders realise and exploit the associated risks attached to the loan and the probability of the individual defaulting on the debt.

Alarmingly, a typical customer completing six average loans per year could save between £30 and £60 if the marketplace was more competitive. Over the course of time, this would reduce 6 loans down to 5.[7]

how an individuals credit rating is at risk

The majority of individuals turn to payday loans because they cannot access an overdraft or short term loan facility from their current bank provider and their need for cash is usually urgent, often as the result of an emergency or mismanagement of funds.

Even with interest rates at 4000%+ APR, a payday loan can still cost less in real pounds than accessing an unauthorised overdraft with the main high street banks. Watchmywallet.co.uk proved that a small loan from Wonga was effectively cheaper in comparison to the main bank fees.

The Financial Ombudsman Service informed the Observer newspaper that evidence has already been produced to show that mortgage lenders discriminate against payday loan borrowers. By checking bank statements, mortgage and other lenders can see that the consumer has accessed a payday loan, which automatically signifies that the person’s finances have already been under pressure and this will most likely reduce their credit scoring. In simple terms, the banks believe that customers who apply for payday loans are more likely to miss repayment dates consistently.[8]

the restriction of payday loans can harm consumers

The Community Financial Services Association of America concludes, from their full study on payday loans, that;[9]

  • Foreclosing viable options for credit because they are thought to be too expensive does not make the need for credit go away.
  • Eliminating payday loans does not eliminate the need for short-term credit.
  • Lack of access to payday loans would likely cause [customers] substantial cost and personal difficulty, such as bounced checks (cheques), disconnected utilities, or lack of funds for emergencies such as medical expenses or car repairs.
  • Deprivation of access to credit could cause substantial economic and personal harm if it forces the consumer to go without the means to meet necessary expenses such as medical care, car repairs, living expenses, rent, or work-related expenses such as transportation or appropriate work clothing.

the impact of working in the payday loan industry

The May, 2009, IHS Global Insight into the economic impact of the payday lending industry, shows just how important the industry is to the employment market and although these figures are related to the US, the numbers of people employed in the payday loan industry in the UK are high because many businesses still operate as store front/high-street operations which includes payday lenders, pawnshops and similar operations. Although over 50% of the industry operates online, the very nature of an individual requiring emergency cash, may see them turn to a high street business as the quickest and easiest means to boost their bank balance.

In the US;[10]

  • 155,000 jobs support the payday lending industry
  • 77,000 people are employed direct
  • 24,000 people are employed in storefront locations
  • 29,000 jobs have been created in supplier industries
  • $2.6 billion was directed to federal, state and local tax, in 2007

In the UK;[11]

  • There are around 2000 high-street payday loan shops
  • There may be as many as 100 online businesses offering payday loans

A brief look at the facts will show the current predicament of payday loan applicants in the UK, compared to the number of payday loan shops in the area where they live;[12] [13]

  • There is one payday loan shop for every seven bank and building societies on the high street
  • Glasgow operates 40 payday loan shops
  • There are eight payday loan shops for every 100,000 residents in Lewisham, London
  • One payday business operates 1500 shops across England, Scotland and Wales
  • 80% of payday loans are completed by the largest Internet lenders
  • Mapping proves that payday loan shops are clustered in areas of deprivation
  • Lewisham is the 16th most deprived of 326 local authorities in England
  • Halton, Merseyside is the 32nd most deprived local authority in England with seven shops for everyone hundre100,000 residents
  • Liverpool, the fifth most deprived local authority, has 26 payday loan shops
  • West Dumbartonshire Council claimed that 26% of children are growing up in poverty and 25% of residents took some or all of their income from welfare support
  • Unsurprisingly, Richmond, Kensington and Windsor have less than one shop per 100,000 residents

Barking and Dagenham is a borough where, according to census information, 73% of employed people are in low paid work and 41% of working age people are economically inactive.

These are exactly the people that will be attracted to payday loans and potential predator private business people (known as loan sharks,) having been previously cut out of the options for alternative financing.[14]

By July, 2013, there were around 240 payday lenders in the UK marketplace, moving 2 billion pounds of cash advances to applicants.

At that time, the typical payday loan was around £270 and 50% of payday lender’s revenue came from 28% of loans which were rolled over at least once. More worryingly, 19% of revenue came from 5% of loans that were rolled over 4 or more times.

7,221 individuals with 5 or more payday loans asked StepChange, the debt charity, for help.[15]

do press reports exaggerate?

Of course they do. It is a journalist’s intention to make their headline and story stand out from the many hundreds of thousands trying to find space in the general and social media. The headline is designed to make you read the story. Some reports will exaggerate the truth or simply miss out several points of interest because they do not help carry the story. It’s better to tell the account of a person who took out a £200 loan and still owes £1,500 after x months than talk about the thousands of loans that complete perfectly and on time.

The emerging payday loans market has helped bring hundreds, if not thousands of stories of terrible woe for families involved with payday loans that have escalated out of control and taken over the family’s or individual’s lives.

In March, 2014, the popular financial website, this is money.co.uk, used their headlines to show one 23 year old lady, Lisa Kelly, and her applications for payday loans accepted by eight lenders across three days. This allowed her to run up a debt of £3000. 50% of the lenders were uninterested in her monthly spending, and therefore, in her ability to repay the debt and only one lender asked if she had other loans and still gave her the money when she declared the other concurrent loans; deeming her a better risk if others had already said yes. This is pretty hypercritical of money.co.uk that actively promote payday loans and happily work with known companies that have business models that are less than reputable!

This spoof application saw her applying to over 40 payday loan firms and achieving 8 successes for loans totalling £2340. Nevertheless, the number of payday lenders that refused and rejected her application, were far higher than the successes. Some of the higher loans were successful as she had completed payday loans with the businesses, previously.

To show a clear background, she has a poor credit rating and her partner owns the mortgage and utility bills in his name only. To clarify, none of these expenses would show up as her regular monthly costs.

The upside to this example is that the Financial Conduct Authority (FCA) introduced rules and regulations that came into force two months after this journalistic experience. The changes in the rules would have made most of the lending quite difficult for the lenders, because they would have needed to have completed affordability checks and to find out if she had other payday loans in existence.[16]

Despite the new regulation that began in April, 2014, by September, 50% more people asked debt charities for help after applying for, receiving and struggling with payday loans.

StepChange advised of £72 million worth of payday loan debt between January and June, 2014, which is up from £51 million compared to the first six months of 2013. The charity helped 66,557 people during 2013, compared to 36,413 in 2012. Their average client held three payday loans. 2013 saw the charity deal with 202,333 payday loan debts, compared to 109,302 in 2012.[17]


The charity’s chief executive, O’Connor said:

“The widespread harm and misery caused by payday loans continue unabated. The industry has failed to address the problems causing untold misery and damage to financially vulnerable consumers across the UK.”[18]


He also went on to say;

"Today's figures show that the payday market all too often fails to treat customers fairly, especially those in financial difficulty," he also said. "High-cost short-term credit is rarely the answer to financial difficulties. While the FCA's proposed price cap is a crucial step forward, there is still much work to be done to ensure that payday loans can no longer plunge people into a cycle of unsustainable borrowing and entrenched financial hardship.”

He added:

"Consumers will continue to need access to short-term credit and FCA action should also stimulate the reform of this market. This needs to include problems in the adjacent markets including overdrafts, logbook loans and home credit where consumers also suffer detriment.”

Perhaps as an implication of how payday loans potentially trap consumers into a downward spiral of further debt, Which? Claimed that as many as one third of people have experienced worse financial problems after they have taken out a payday loan, compared to before.

As a society, 60% of people taking out payday loans use the money to pay household bills and for essentials like food, petrol and nappies, removing the picture that the money is mostly used to purchase the latest smart phone or current trendy gadget.

57% of people claimed that they were encouraged to take out further loans and 45% of people rolled their loans over at least once.

One of the additional stresses for people taking out payday loans was that 33% received unsolicited telephone calls, texts and emails from payday lenders, before the agreement was signed.[19]

payday loan adverts

There has been a severe crackdown against irresponsible and misleading practices stemming from payday loan adverts and have been reported to the Advertising Standards Authority (ASA).

After April, 2014, new regulations should ensure that adverts are fair, true and do not aim to mislead potential consumers. Payday loans are essentially for emergencies and for a shortfall of cash that can be put right on the next payday. Several previous advertisements implied that loans could be used for birthday celebrations and going on a shopping spree.

Several well-known personalities have been used in the marketing activities of payday lenders. One in particular, saw the celebrity removed for the marketing focus after she was forced into bankruptcy for the second time in a short period of years, making her perhaps, not the best example, for payday loan applicants.[20]

Advertising on television, aimed at children, usually for expensive toys or gadgets, has led to children asking parents and guardians to take out a payday loan because they know it is a quick easy fix to cash flow problems. Where these payday loan adverts are shown during children’s programming time, it is easy for children to put two and two together and make 4 and put pressure on their parents or guardians for a loan and purchase.

social media for payday loan applicants

The Financial Ombudsman Service (FOS) has learned that social media is heavily involved with the payday loans market. In particular, applicants can use their smart phone or tablet computer to apply for their loans and in return the FOS has turned to YouTube to warn people about the potential problems of taking out payday loans.

These actions show how government departments and payday lenders are making the most of meeting their consumers head-on by living in the same environment; social media of every category, including Facebook, Twitter, YouTube and email.

Social media and online forums are being used by individuals asking, by word-of-mouth, for information about which payday lenders appear reputable and which operate almost like loan sharks.

Unfortunately, like Wikipedia, the information provided may well be true, but it could also be misleading or false. Many people are being sensibly directed to one of the debt charities or the Citizens Advice Bureau, but there are countless complaints about the efficiency and advice on offer, with large numbers making the recommendation that people in debt may not see their problems go away, but purely extended onto a longer timeframe.[21]

payday loan applicants do not worry about the superrich

While 99% of the population is worth less together, than the top 1% of earners in the UK, the so-called superrich view the lower classes as subhuman. Princeton University in the US proved, through research, that the brain reacts negatively when considering a viewpoint about poor people. Berkeley and Amsterdam psychologists have shown that where the social gap is larger, far less compassion is shown to people in difficult circumstances.
In comparison, payday loan applicants will not waste their time worrying about the financial circumstances of Britain’s superrich, because although they exist in the same group of countries, their lives could not be further apart. Neither understands the other and the challenges of life in their community and circumstances. [22]

The rich have been getting richer and the middle class are perceived closer to poor than at any time in the last 100 years. The national minimum wage, of £6.50 an hour, would be £18.89 per hour if the rate had kept pace with the salaries of the CEOs running the top 100 countries trading shares on the UK stock market.

incredibly and to quote the circumstances

“The unstated implication is that the lowest-paid staff are lucky to have any job at all, and only have what they have thanks to the benevolence of the 1%, with their superior leadership skills.”

While Barclay’s Bank pays employees several hundred people earning more than £1 million a year, hundreds of thousands of workers, many on the minimum wage, use payday loans, simply to get through from one month to the next.

While the top rate of tax continues to reduce, government continues to target reductions in benefits, which are, of course, forms of essential cash flow for the poorer element of society, who may not have easy access to a food-bank.

When parents suffer, financially, children in those households will suffer the most from spending cuts. Where a parent or guardian struggles to find sufficient cash flow to feed and clothe their family, their only recourse, apart from saying no, to fund the latest gadget request, may only be by the completion of a payday loan.[23]

conclusions

  • more people than ever before are turning to payday loans
  • individuals require the money simply, quickly and effectively; rather than considering the best rate and in full deliberation of the long-term effects of taking out a payday loan
  • payday loans are now part of everyday topic conversation
  • debt problems have increased since payday loans were regulated
  • significant numbers of people are applying to debt charities for help and assistance
  • fewer payday lenders operate in the marketplace
  • a handful of payday lenders dominate the marketplace off-line and online
  • individuals with payday loans may experience difficulties sourcing loans from traditional sources
  • with more regulation to help consumers, more individuals will be refused payday loan applications and will turn to other forms of funding, such as pawnshops and loan sharks
  • the three largest lenders account for 70% of income generated by payday lending, which means they can set the market pricing and valuation for interest, fees and other obligations

Payday loans are now a statement of fact, a figure of speech and a first point (and only) of call for millions of UK citizens. For those who fail to qualify for a loan, the future may reveal loan sharks hanging around.

Could it be argued, that one of the key reflections on society is that the main banks have closed their doors to people in real need and payday loans are simply covering the gap between low wages, higher prices and greater requirements for the modern family in the digital age?

refrences

[1] forbes.com/2009/01/14/global-recession-2009-oped-cx_nr_0115roubini.html
[2] ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=ABMI&dataset=qna&table-id=A2
[3] cfsaa.com/our-resources/policymaker-resources/restricting-payday-loans-harms-consumers.aspx
[4] dailymail.co.uk/news/article-2588899/Payday-loans-adverts-NOT-banned-childrens-TV-despite-claim-lenders-grooming-new-generation-borrowers.html
[5] gov.uk/government/news/payday-borrowers-paying-the-price-for-lack-of-competition
[6] calcderby.org/social-policy/employment-tribunal-awards/
[7] theguardian.com/money/2014/jun/11/payday-loans-uk-borrowers-overpaying
[8] theguardian.com/money/2012/nov/17/payday-loans-credit-rating
[9] cfsaa.com/our-resources/policymaker-resources/restricting-payday-loans-harms-consumers.aspx
[10] ihs.com/products/global-insight/index.aspx
[11] bbc.com/news/business-16067283
[12] theguardian.com/money/2014/mar/12/uk-payday-loan-shop-banks-building-societies
[13] theguardian.com/society/communities
[14] theguardian.com/culture-professionals-network/culture-professionals-blog/2014/sep/15/working-class-people-subsidised-theatre
[15] telegraph.co.uk/finance/10203843/Payday-loans-industry-by-numbers.html
[16] thisismoney.co.uk/money/cardsloans/article-2573686/Woman-allowed-EIGHT-payday-loans-time.html
[17] independent.co.uk/money/loans-credit/money-alert-soaring-payday-loan-problems-9715860.html
[18] independent.co.uk/money/loans-credit/disastrous-impact-of-payday-loans-laid-bare-with-82-per-cent-increase-in-people-seeking-help-in-just-one-year-9155415.html
[19] telegraph.co.uk/finance/personalfinance/money-saving-tips/9273169/Payday-loans-trapping-consumers-in-a-downward-spiral-of-debt.html
[20] citizensadvice.org.uk/index/pressoffice/press_index/press_20140301.htm
[21] debtquestions.co.uk/debt_forum/viewtopic.php?f=7&t=30703
[22] greatergood.berkeley.edu/article/item/look_twice
[23] theguardian.com/society/2014/sep/15/how-super-rich-got-richer-10-shocking-facts-inequality

 

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