A cap on working age benefits and the so-called “bedroom tax” are among the measures taking effect that are expected to exacerbate the personal debt crisis in Scotland, driving more people into the arms of pay-day lenders in a bid for financial breathing-space.
The number of people going to the Stepchange Scotland debt charity for help with pay-day loans has already soared fivefold in just two years, with an average of £1,665 owed to pay-day lenders. It believes demand for the loans is set to accelerate further.
Sharon Bell, of StepChange in Scotland, said: “We are very concerned that changes to the benefits system may lead to a further increase in people resorting to pay-day loans to address financial problems.”
There’s already a strong link between pay-day loan demand and the Government’s welfare reforms, according to Citizens Advice Scotland (CAS). Keith Dryburgh, policy manager at CAS, said: “It’s no coincidence that the growth of the pay-day loans industry over the last few years has taken place against the background of the recession and the Government’s harsh welfare reforms.”
With affordable credit in short supply on the high street, pay-day loans are the most obvious source of borrowing, he pointed out. “It stands to reason that, if your income goes down and you still have to pay your rent or mortgage, food and fuel bills, you need to get the money from somewhere,” said Dryburgh. “Further cuts to the welfare system will only make these matters worse.”
Next month’s changes taking effect include the 1 per cent benefit cap, which affects working age payments such as tax credits, income support, jobseeker’s allowance and maternity pay. At the same time, more than 100,000 social housing tenants in Scotland will be hit by the bedroom tax, losing up to £52 a month from their housing benefit if they are deemed to have one or more spare rooms.
Younger generations affected by the cuts are especially vulnerable to pay-day lenders, said Bryan Jackson, corporate recovery partner with accountants and business advisers PKF.
“Given that pay-day loans tend to be taken out by people in the 18 to 34 age group and the unemployment rate is higher among younger people, it would seem logical to assume that this group may be tempted to cover any financial shortfall with a pay-day loan,” he said.
Marlene Shiels, chief executive of Capital Credit Union in Edinburgh, said the only silver lining is that pay-day lenders don’t generally lend to people who rely solely on benefits. Unfortunately, however, many of the cuts kicking in next month will hit people in work.
“For us, the major worry will be those in employment but on low wages that will fulfil the loan criteria, who won’t read or understand the terms and conditions and the implications of non-payment and who will see this as a quick fix to get to the end of the month for day-to-day living,” said Shiels.
But pay-day lenders denied that the benefit measures represent an opportunity for them. Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents some of the UK’s largest pay-day lenders, claimed they would not be lending to people who can’t afford their repayments, whether in work on dependent on benefits.
SMALL PRINT STILL BAFFLES
Seven in ten Scots leave themselves open to rip-offs and shock charges by signing financial contracts without reading them, new survey results show.
Paypay and eBay agreements, online retailer terms and conditions and contracts for broadband, phone or pay TV are the deals that Scots are most likely to sign up for without checking them first.
Most of those failing to read and ensure they understand what they are paying for say the small print is too lengthy and complex, according to the research by Debt Advisory Centre (DAC) Scotland.
Almost a quarter of those who skipped the small print wish they taken more time to go through before committing themselves, particularly when it came to credit or loan agreements. Men are more likely to rush in without checking the details. Six in ten said they found contracts too difficult to understand.