Should you ever take out a payday loan?
YES: Caroline Walton, president of payday loans trade body the Consumer Finance Association
Should you ever take out a payday loan? The very question rings alarm bells. It implies you would have to be desperate or misguided to even consider it.
But if I asked "Should you ever take out a mortgage or a credit card?" you would probably just say, "Well, it depends on my own personal circumstances". Which is how it should be for all financial decisions you make.
Unfortunately, many people have a cynical view of the payday industry and I understand that because it isn't traditional, but having worked in the industry for 13 years I feel I'm qualified to offer you an alternative view. I have been fortunate enough to talk to a lot of customers over those years and their views are incredibly compelling and powerful.
Sitting with a group of payday borrowers (not the extreme cases we read about in the press but those who actually use payday loans as they are intended to be used) is an enlightening experience.
At one focus group, a single mother in her 40s talked about managing from month to month. She had to juggle work and taking care of her teenage daughter. She talked about the rising cost of food and fuel and the difficulty of coping when something comes up at school she needs to pay for. She didn't see herself as vulnerable; she saw herself as managing but needing help every now and then. "Yes, I know a payday loan is expensive, but it works for me, I wouldn't use it long term. It's like having something for an emergency in my back pocket," she said.
None of the participants of the focus group considered that payday loans were bad. All of them understood their loans had to be managed the same way as a credit card or an overdraft. All of them understood exactly how much it cost and that it was expensive if rolled over.
The fact is we are all adapting to the tough economic climate. We hear lots of stories about families trying to juggle multiple jobs to maintain their lifestyles, looking for ways to manage monthly costs and finding it harder to save. But that doesn't make everyone vulnerable. It makes people resourceful, adept and more aware of their finances.
The uncertain times we live in have concentrated thinking into short-term periods that payday loans suit so well. Borrowing for now with a quick repayment and not over-borrowing is the key to keeping debt under control.
And when people borrow from a reputable lender, they know they are protected by strict regulation and procedures. Quite simply, responsible lenders will assess affordability and will explain everything clearly as well as having help at hand for you if you get into financial difficulty.
NO: Sarah Bowles, IFA at MAC Financial Advice, specialising in ethical investment
Should you eat yellow snow? Will there be bluebirds over the white cliffs of dover? Should you ever take out a payday loan? All questions to which the answer is no.
Why? In the case of payday loans the answer is quite simple – if you are not in serious financial trouble, you should not use them as you don't need them and they are expensive. If you are in serious trouble, you should not use them as they will make the trouble worse.
It's a deceptive and pervasive lie that debt is harmless and payday loans are just a way to make it to the end of the month without budgeting.
Just in case the daytime tV adverts purporting to target working people make you think payday loans are a harmless way get easy money, let's look at some of the statistics about those who ask for specialist help with debt. according to Christians against Poverty:
- 78% of people said debt affected their relationships
- 78% said their health had suffered
- 70% feared losing their home
- 62% of people with children said it affected their ability to feed and clothe their children
- 45% said they had considered suicide before they called for help
- 42% were prescribed medication to assist with the stress
- 24% said debt led to the total breakdown of their relationship
Living costs are rising and pay rises are not keeping pace with inflation. the more payday loans are advertised, the more they squeeze out the alternatives. Payday loans are nothing more than an over-priced, under-regulated form of debt; the unruly and sinister black sheep of an unsavoury family of debt.
By far the better solution is to budget and have an emergency fund to call on for unexpected expenses. other alternatives can be to earn money from your hobbies or a second part-time or temporary job. you could also sell or rent items you don't need. And always check if you are entitled to state benefits or an emergency grant or loan.
However, there are an increasing amount of credit unions which can offer assistance to a lot of people within three days. They are less well publicised than payday lenders but offer much better services with APRs 185 times lower.
The archbishop of Canterbury, Justin Welby, and the Church of england [who have pledged to set up their own credit union] can only be a welcome player in this area. the more advertising credit unions get, the more likely they are to be the first port of call for those in need of help.
My last issue with payday loans is they target those with poor credit ratings and in doing so group those in genuinely dire circumstances with the feckless. the former group should have safer alternatives and the latter should not be subsidised by poorer members of society.
Credit unions offer a genuine affinity or neighbourhood group with collective concern.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.