Short term repayment problems double as payday loans become more popular
Short term loans, also known as payday loans in the UK, are a great way to borrow money on a short term loan basis for unexpected emergencies but when borrowers start rolling over loans, or borrowing money from more than one payday lender at a time, problems with paying back the loan can manifest.
According to the charity Stepchange the number of people asking them for help has almost doubled in the past year. Stepchange also report that average debts exceed the monthly pay of borrowers. Clearly the benefits of the recovering economy in the UK are not yet filtering down to those whose budgets are tight. In the past year 66,557 people asked for help with short term or payday loans from Stepchange. This is an 82% increase on the 36,413 people who asked for help with payday loans in the previous year.
Have one short-term loan at a time
The sensible way to get a short-term loan from a payday lender is to have one payday loan at a time, pay it off with no rolling over, and then if necessary to get another short term loan from the same payday lender; the lender you trust. Stepchange says that the industry has failed to address the problems with short term debt in the UK which is causing misery to those consumers who are financially vulnerable. The government is attempting to address the problem. Chancellor George Osborne announced in November that the Financial Conduct Authority will bring in a cap on interest and charges. They will also impose new rules on affordability checks which are conducted by payday lenders.
Charities such as Citizens Advice and Stepchange say that the importance of affordability cannot be understated when it is a fact that the average income of clients seeking help with short term loans is 1,381 pounds per month, less than they owe in payday loans. This suggests that people are allowed to borrow without the correct checks being in place. It is incumbent upon a payday lender to do the appropriate checks in order to safeguard themselves and their clients. Not only are these people seeking help burdened with payday loans but many of them also have other debts. 62% have overdraft debts, 60% have credit card debt, 45% have personal loans and 39% have catalogue debts to pay off.
In 2013 Stepchange saw clients with 202,233 short term loan debts in the UK totalling 110million pounds. This was up from 60million pounds in 2012.
It is hoped that the FAC’s proposals will address some areas of consumer detriment but there is an urgent need for more radical reform in terms of affordability checking, repeat borrowing and rollover. As payday lenders well know, if a client is not truthful with their situation regarding existing loans, it is difficult to assess the situation. Most reputable and transparent payday lenders will do a thorough job of checking a potential client’s credit record. Borrowers also need to be responsible for how much money they borrow because, well, it has to be paid back! There is no amount of reform that will help the situation if people are not responsible in their borrowing.