Short-term lending is not, in itself, a new-fangled idea. But since the financial crash in 2008, demand for fast easy credit has boomed. In short, this is due to falling household incomes and the rising cost of living, combined with new and easy electronic access offering instant loans.
With wages stagnating or falling and the price of everyday goods like food and fuel rising, thousands of Scots are in dire financial straits. As one of our
clients put it recently, “there’s too much month left at the end of the money”.
In such dilemmas, many people feel they have nowhere to turn. At Citizens Advice Scotland we recently revealed that the number of people approaching a CAB in need of emergency food parcels has doubled in the last two years. Many of the recipients of such help are either in work on low pay or desperately seeking jobs that will pay enough to live on.
At the same time, the safety net of the state is increasingly disintegrating as the coalition government’s £18 billion of benefits cuts starts to take hold. For example, tax credits for people in work have been cut, leaving 85,000 low income households in Scotland worse off. The qualifying criteria for benefits that were supposed to exist as a last resort – hardship funds and crisis loans – have also been tightened, making it harder to get one when you really need it.
So it’s no surprise that more and more people are turning to debt as a short-term fix in the hope of finding a way out of their troubles. In fact, a third of the cases that citizens advice bureaux now deal with are related to debt.
Most payday loans are for small amounts of money – usually around the £200 mark – and are for a short period of time such as a month. But what you end up paying back can be significantly higher with interest rates reaching as much as 4,000 per cent.
If you’re on a low income, a payday loan might seem like an attractive option. Suddenly you have cash in hand and you can put electricity on the meter and food on the table. And for someone with temporary financial problems in need of a short-term fix, it might even make sense. But if you’re facing a shortfall every month, the exorbitant interest rates quickly become unaffordable and a spiral of debt becomes inevitable. One CAB client typifies that experience – with a payday loan now totalling more than £900 she has had to go without essentials to meet repayments. To extend the loan for four weeks would cost another £170.
And it’s not just the perilously high interest rates that cause problems. If for whatever reason you can’t make a payment, you will face additional fees. Like one CAB client who had an accident at work, leaving him hospitalised and without income for more than a fortnight. The payday lender took extra unscheduled payments from his account without his knowledge, forcing the client to take out another payday loan to cover his rent and the charges on the first loan.
Shockingly, many payday lenders have a clause in their terms and conditions that means they can take money from your account without your knowledge. What’s more, lenders don’t have to tell you how much they are going to take or when.
It is also increasingly common for our bureaux to see clients being chased for payments to such an extent that many see it as harassment. One client defaulted on her loan after being off sick, but not before she had offered a repayment plan. The payday lender refused and continued to call the client at home, on her mobile and eventually at work, including speaking with her boss.
One of the main reasons that people turn to high cost credit is because they believe they won’t get credit elsewhere. This isn’t always the case. Credit unions provide affordable credit for an increasing number of people in Scotland and many credit unions offer what is in effect an affordable version of a payday loan.
If you want to know what lending options are available in your area, or if you need help managing an existing debt, your local CAB offer free, confidential advice.
• Margaret Lynch is chief executive of Citizens Advice Scotland