PAYDAY LOANS AND THE DEBT SPIRAL

“It’s not just the weak that can end up in a debt spiral”, wrote Simon Read of The Independent (London) a couple of weeks ago. I was reassured to read that, because I had ended up in that very spiral in the late 90s and I didn’t want to think that I had been weak. Oh no, not me.

The article was topical. Payday loans had hit the headlines again when R3, the professional association that represents insolvency practitioners, warned that up to 3.5 million people in Britain are expected to take out a short-term loan to tide them over in the coming six months.

First, the good news …

Simon Read says of the loans: “if you need emergency cash and know you can pay it back within a few days, then paying £20-£30 for the privilege doesn’t seem too bad, especially bearing in mind how much the charges and interest can add up to if you go into the red at a bank.”

Then the bad news …

But as Read says, and I have written in these pages before, the obvious problem is that if you don’t repay the loan quickly then it mounts up: it spirals, in fact. What’s more, you could end up paying bank charges and interest anyway, as well as the interest to the loan company.

Wonga boss explains

The most interesting part of the piece was this. Because of the negative publicity, Wonga’s boss Errol Damelin got in touch with the Indy to offer a defence of his business methods. He said: “If things go wrong we charge a one-off default fee of £20 and then stop any further interest at a maximum of 60 days.”

That sounds fair and it’s the kind of responsible business practice that Simon Read, and in fact all of us, would like to see, though I’d like to know how Wonga defines “when things go wrong”, i.e. when does this kind of “interest cap” kick in?

The Independent would like to hear from anyone who’s had experiences (good or bad, I trust) with Wonga or other payday lenders who claim to operate fairly.

Author’s payday loan spiral

The article concluded by recommending a book by Steve Perry, entitled When Payday Loans Go Wrong. It describes the author’s “descent into debt hell”, which started innocently enough with a £250 loan for a weekend away but ended 18 months later with 64 loans from 12 different companies totalling £15,000.

My own debt experience was not caused by payday loans … but the result was similar. My business started to go wrong, so I started funding it with personal credit cards. I ended up owing a total of £65,000 to 23 separate  creditors and narrowly avoided bankruptcy. Different cause but the same spiral, which I described in my book “Back to the Black.”

WANT TO KNOW MORE?

For the full Simon Read article click here: http://www.independent.co.uk/money/spend-save/simon-read-its-not-just-the-weak-that-can-end-up-in-a-debt-spiral-6275149.html

For information about Steve Perry’s book “When Payday Loans Go Wrong”, click here: www.saynotopaydayloans.co.uk

For information about my book “Back to the Black”, click here: http://michaelmacmahon.com/books/back-to-the-black-how-to-become-debt-free-and-stay-that-way/

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