’Tis the season to be wary, as your loan costs will be scary

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THE season of goodwill is set to deliver particularly happy tidings for pay-day lenders and other credit providers – all while Scots sink deeper into debt.

Households may be battening down the hatches by cutting their spending and ­paying down their debts, but Christmas brings with it numerous financial temptations. From presents and food to parties and nights out, the festive season can undo all the good work of keeping finances in check – and pay-day loan firms know it only too well.

Adverts promoting extortionate Christmas loans have, in recent weeks, begun to pop up with alarming regularity, prompting warnings of a potential escalation in Scotland’s debt ­crisis come the New Year.

Bryan Jackson, corporate recovery partner with PKF, said: “There is always a temptation at Christmas to borrow to pay for gifts, food and festivities.

“This has always been the case but is made more difficult now with the easy availability of very expensive credit through TV adverts by online lenders charging exorbitant rates of ­interest on relatively small sums of money.”

Those adverts promote short-term loans as a solution to Christmas cash anxieties and a way of being able to make the festive season an extra special one.

With interest rates of up to 4,214 per cent APR, however, short-term loans often become long-term debt millstones, said Jackson.

“The problem is that what may start out as a small loan quickly builds into a larger debt and individuals find that two, three, four, five or six months after the tinsel and decorations have been packed away people are still paying for a Christmas they can barely remember,” he said

Pay-day loans are a growing problem in Scotland. The number of people struggling to reach the end of each month without even bigger debts because they are trying to repay pay-day loans is double the rate across the UK as a whole, according to research by R3.

The insolvency trade body said 7 per cent of Scots have prioritised pay-day loan ­repayments over spending on food and warned that Christmas would send even more people spiralling into debt.

“A couple of hundred borrowed on a whim just before Christmas may become an insurmountable debt once the New Year hangover has disappeared,” said R3 member Iain ­Fraser. Pay-day lenders are not alone in seeking to capitalise on greater demand for cash at this time of year.

Store cards and credit cards are also ­expensive if they are not cleared in a timeous fashion. The discounts offered by retailers to those taking out store cards are tempting for Christmas shoppers, but most have interest rates of around 30 per cent APR.

Fortunately, however, there are more ­affordable ways of easing the financial stress of Christmas.

The popularity of Christmas savings clubs plunged after the messy demise of Farepak six years ago. Its unregulated status means that compensation is only now being paid out to the 120,000 or so people who lost an average of £400 when the company went bust.

The Co-operative will next year launch year a new Christmas savings scheme that gives ­savers greater protection than that offered by the Farerpak scheme.

In the meantime, the Post Office, some banks and building societies and several ­credit unions offer dedicated Christmas savings ­accounts. These differ from normal accounts in that you can save into them all year but not ­access your money until October or November. Some providers, including the Post Office, do allow earlier access, albeit for a small fee.

The Christmas savings account launched this month by Scotwest Credit Union in the wake of the Farepak scandal, paid out almost £1.1 million to 1,600 members (including our case study).

Rod Ashley, chief executive of Scotwest Credit Union, said: “It is amazing how quickly savings can build up.

“Like it or not, Christmas does come around once a year and putting some time into planning ahead can help ensure you enjoy the festive period without feeling the effects of a financial hangover come January.”

But how can you take some of the financial stress out of the coming weeks if you don’t have savings set aside?

One way is to be smart with credit. For ­instance, credit cards with 0 per cent interest periods can be very useful at this time of year, as long as the balance is paid off when the ­interest-free period ends.

Credit isn’t easily available, however, so the focus for many people will be on cutting costs where they can. Whether it’s agreeing spending limits, creating presents, making smart use of online resources – such as www.smartfreestuff.co.uk – or just taking time to compare costs before buying food and gifts, there are ways of making savings. Jackson said: “While nobody wants to be seen as mean at Christmas it is more important to be realistic than indebted. Set a budget that you can afford and stick to it. It is better to have a Christmas that you enjoy and can afford than one which produces sleepless nights in the New Year.” But with the cost of living climbing again, ­unemployment rising in Scotland and wages stagnating, piecemeal savings won’t be enough for many households this Christmas.

If you are struggling financially and worry that Christmas may push you over the edge –particularly when record-high winter energy bills land on doormats early next year – the key is to seek advice before taking desperate measures such as pay-day loans.

“You have to acknowledge that if you need to borrow money at several thousand per cent interest per year, then anything you are thinking of buying is not worth it,” said Fraser of R3.

“This is an unpalatable message at the best of times and at Christmas it can seem cruel but it is surely more cruel to face serious ­indebtedness in the New Year.”

If you are struggling with debts, free ­advice and support is available from your local ­Citizens Advice Bureau and debt charities ­including StepChange (0800 138 1111 or www.stepchange.org) and National Debtline (0808 808 4000).