MAGGIE is a 42-year-old support worker from Dundee. She has two children and works full time, taking home just over £1,000 each month.
After taking time off when she was ill last year, she returned to work with a payday loan of £300 to cover food and petrol. She couldn’t meet her first repayment, so took another. So it went for a year, borrowing more to repay more, with Maggie robbing Peter to pay Paul.
Five payday loans, five doorstep loans, two overdrafts and a credit card debt later, Maggie couldn’t cope. Her loans totalled £10,377, she had £1,878 rent arrears, £4,100 council tax arrears, and was now pre-paying her gas and electricity. She couldn’t sleep, felt shame, regret and fear, but most of all she couldn’t stop worrying. Welcome to the world of problem debt.
Maggie’s story is just one I heard this week at the opening of StepChange Debt Charity Scotland’s new office in Glasgow. The charity has recently doubled its debt adviser team there to 14, making it Scotland’s leading provider of free specialist telephone and online debt advice.
Demand is certainly there. In the first six weeks of this year the Glasgow office advised more than 1,000 people on their debt problems, an increase of 41 per cent on the same time last year. Online (and anonymous) advice was given to just under 1,000 Scots in the same period, an increase of 31 per cent. We all know that as costs rise and incomes fall, household budgets are being squeezed; 38 per cent of the Scottish clients we counselled last year had arrears in household bills, 20 per cent had council tax arrears, 6 per cent more than the UK average, while a significant proportion also owed money for energy, mortgage and rent. Average rent arrears in Scotland rose sharply, from £591 in 2011 to £879 in 2012.
There are some positives. Average unsecured debt of clients in Scotland is falling, from £19,325 in 2009 to £14,223 last year, and it has fallen on conventional credit in particular – down 20 per cent on credit cards and 30 per cent on personal loans. But this decline may be as much about the withholding of credit as it is about withdrawing from it, and into this gap has stepped the payday lender.
StepChange Debt Charity has seen a dramatic rise in Scotland of people seeking help on payday loan debts, with numbers jumping fivefold in the last two years. We helped more than 1,000 Scots take control of their payday problems in 2012, up from less than 300 in 2010, with their total payday debt increasing eight times to almost £2 million.
Not only that, but the average payday loan debt of a StepChange Debt Charity client in Scotland – at £1,665 – is now 31 per cent higher than their average monthly net income of £1,268. More than one in five Scottish clients now have contractual credit payments worth more than their monthly income.
If you’re shocked, you’re not alone. This week the Office of Fair Trading reported that 5 per cent of payday loans are “rolled over” four times – ie when repayments cannot be met – yet this represents 20 per cent of the lenders’ revenue – 50 per cent of their revenue comes from such “rolled- up” debt. And if this sounds like simple hard luck, consider this: only 12 per cent of lenders examined by the OFT were able to show that they actually checked whether their customers could repay.
StepChange Debt Charity welcomes the OFT report and their demand that the industry improve in the next 12 weeks or risk losing their licences. We also support their decision to refer the payday loan market to the Competition Commission. If payday lenders are benefiting from market failure the regulators must intervene strongly, including using their powers to cap prices if necessary, to ensure value for money for consumers.
But the huge issue is to stop payday loans from dragging more people into unmanageable debt. The Scottish Government has shown good intent recently, bringing forward new rules to freeze interest under its Debt Arrangement Scheme, part of a package of reforms to be brought forward by the Bankruptcy Reform Bill later this year. Now the UK government, OFT and new Financial Conduct Authority must deliver a package of measures to ensure consumers are protected.
In particular, we would like to see limits placed on the number and size of payday loan debts that anyone can build up at one time and a limit on the default charges that can cause these debts to spiral out of control. The cycle of irresponsible lending and acute debt problems must end.
• Wilf Stevenson – Lord Stevenson of Balmacara – is chair of StepChange Debt Charity