Gina Davidson: Debt is thriving on payday loans

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THERE was a story earlier this week which received little notice given that it didn’t involve the retirement of a football manager or an elderly lady reading out a Daily Mail editorial in the House of Lords. The number of people who needed urgent debt help after taking out a payday loan doubled last year.

The amount of debt owed had also risen. The average is now £1657 rather than the £1267 it was in 2011. As a result more people are being left just paying back the interest on these “get cash quick, no questions asked” borrowings, forcing people into dependency on such borrowing. It’s a fiscal vicious circle and it’s why the industry is now worth £2bn.

It’s easy to say they shouldn’t take out the loans, but when credit is hard to come by through banks, wages are frozen (if you still have a job) and yet prices are climbing, the shortfall has to be made up somehow. Payday loan companies appear to be the answer.

And there are many people in Edinburgh caught in this trap. Take a wander along Gorgie or to the foot of Leith Walk and you’ll find these money stores in abundance. But then, these franchises are always likely to choose to set up shops in areas where people might be struggling to make ends meet, and a quick and easy £100 loan can mean the difference between paying the electricity meter or freezing in this wintry spring.

The plethora of such stores means it is possible to borrow thousands within ten minutes by going from one to another, with no credit checks, no questions asked about existing debt and affordability.

Legal loan sharks is what they are. Why else would they have been chased out of much of America when interest rates were capped in 35 States? Why else are they also unable to operate in many other countries, where it is legally impossible to charge up to 4000 per cent interest? Why else did an Office of Fair Trading investigation discover that up to half the income of 50 of these firms – that’s 90 per cent of the market – comes from long-term loans when people get into financial trouble?

Here in Edinburgh there’s a campaign not just to crack down on unscrupulous lending by such firms but to encourage people who do need credit, but are unable to get it through banks, to find better ways of managing their money. Set up by MSP Kezia Dugdale and involving Citizens Advice, the Church of Scotland, Money Advice Scotland and others, the campaign has many strands, but perhaps the most important is letting people know where to source credit responsibly.

The Capital Credit Union is big enough to offer payday loan deals – but with interest capped at 26 per cent. The loans are open to those not already saving with it, but at the same time it hopes that prudent idea would also rub off. It does work. In its first year of offering payday loans Blantyre CU gave out 2900 of them, saving people £500,000 in interest payments. It also now has these same people saving with it and there’s £113,000 in their accounts.

The government keeps talking of the need to drive down “the debt”. Making it harder for payday loan firms to operate would help those who do need to get theirs under control. But aiding credit unions to make more loans available would be a huge step towards social financial equality.

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