Jeff Salway: Avoid lure of payday loans trap

Fears are growing over the long-term implications of a recent sharp rise in the number of Scots taking out the loans, which charge annual interest of up to 4,000 per cent. Those unable to repay their loan face escalating charges that send them deeper into debt and further away from mainstream sources of finance.

The problem is set to worsen as unemployment rises and UK economic growth continues to stagnate. More than 400 Scots will go bankrupt every week this year, according to insolvency trade body R3, including many who have gone down the payday loan route and found themselves in even greater difficulty.

Bryan Jackson, corporate recovery partner with accountants PKF, said: “If you have a regular need to borrow from a payday loan company, which will often have interest rates in the high hundreds and even into the thousands of per cent APR, then you have a serious debt problem which is not being helped by such loans but which is being exacerbated by these loans.”

Payday loans can lead to spiral of debt, report warns

The number of Scots turning to payday loans more than doubled last year, according to the Consumer Credit Counselling Service (CCCS). It revealed that Scots using payday lenders are increasingly likely to take out more than two loans and are getting into deeper debts with the firms as a result. Almost one in ten Scots getting advice from the CCCS last year about their debts had already taken out a payday loan, up from 3.6 per cent a year earlier, while the amount owed has risen by nearly £300 to £1,199 over the past two years.

Citizens Advice Scotland has seen similar trends and urged those struggling with their debts to seek help. Its head of policy, Susan McPhee, said: “The truth is that payday loans are usually a very expensive way of managing your own money. They will usually make your financial situation even worse for you in the long run, and really should be avoided – particularly as there are other options available to you.”

As McPhee says, there are alternatives to payday loans for those in financial difficulties. Here are some options:

Get help

The likes of the CCCS and Citizens Advice Scotland (CAS) offer free advice to people struggling with debt, worried about loan repayments or just anxious about their finances.

Both aim to resolve debt problems by putting in place long-term solutions and by pointing people in the direction of financial help. “For example, you may be entitled to benefits or tax credits that you are not aware of,” said McPhee. “This might seem unlikely, but in fact CAS advisers regularly find cases of people who are missing out on some sort of benefit or grant – just because they weren’t aware of it.”

CAS bureaux provide benefit checks and offer advice on other ways to maximise your income without turning to high-cost lenders. “If you have already fallen victim to a payday loan or any other type of debt and are struggling to pay it back, we can help you with that as well. And our advice is always free, confidential and impartial,” said McPhee.

Credit unions

Calls grew last week for greater investment in credit unions to counter the use of payday loans after the Bishop of Durham expressed concerns over the “deeply shocking” rates charged.

Credit unions offer short-term loans with interest charges capped at 26.8 per cent APR, making them more expensive than many high-street outlets but far cheaper than payday loans.

Unlike banks and building societies, credit unions don’t routinely carry out credit checks on applicants, meaning those struggling with debts have a better chance of being accepted. However, borrowers must be members of a credit union and typically be able to demonstrate they can make some form of repayments.

Debt arrangement schemes

These plans, which provide a way of repaying debt over an extended period, are increasingly commonplace in Scotland. They work by committing the debtor to payment plans that allow them to repay their debts at a rate reflecting their disposable income.

It is based on a monthly payment that is divided up between creditors, according to the terms agreed. All interest fees, penalties and other charges are frozen if creditors agree to the plan, and the debtor is protected against creditor actions aimed at recovering their money.

Protected trust deeds (PTDs)

This route into bankruptcy is typically used by people with an income and assets – and there has been a sharp rise over the last 18 months in the number of Scots taking it.

PTDs are formal arrangements between debtors and creditors where as much of the debt is repaid as the debtor’s assets will allow. The proposal is drawn up by an insolvency practitioner, based on assets, debt levels and disposable income, and usually lasts for three years.

If enough creditors go along with the arrangement, they can no longer take legal action to recover the debt. They also agree to discharge the debtor from the rest of what they owe, provided the terms of the PTD are satisfied within the agreed time frame.

Sequestration

This Scottish process allows debtors to be made bankrupt either through a creditor’s court action (if they owe £3,000 or more) or by making an application to the Accountant in Bankruptcy (AIB).

Applicants must have been living in Scotland for at least a year, not been made bankrupt in the last five years and have a certificate for sequestration or be eligible for the low income, low assets option (Lila).

All assets must be disclosed to the trustee, including property, and can be sold to help repay your creditors. The debtor can be discharged from bankruptcy after one year if they have co-operated fully and satisfied all requirements.