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/

IS IT SAFE TO PAY YOUR RENT OR MORTGAGE WITH A CREDIT CARD?

 

A recent news item (Channel 4 News, I think) flagged up a potentially alarming problem that’s been caused by the recession. (Yes, that’ll be the recession that the experts say is now officially over. Try telling that to someone who has lost their job.)

 

What’s the problem? According to a report by the charity Shelter, there’s been a large increase – possibly 50% in a year – in the number of people using credit cards to pay their mortgage or rent.

 

Does this affect owner-occupiers? Or tenants? Or both?

 

According to the BBC website, the Council of Mortgage Lenders (CML) suggests that the problem has been sensationalised by the media. That may be true. It would not be the first time. I should point out the obvious, however: the CML’s concern is only for mortgages. What Shelter describes may well be more of a problem for tenants than for homeowners. Mortgage rates are exceptionally low at present, so it’s less likely that an owner-occupier will have difficulty meeting housing costs, other things being equal. Also mortgage payments are normally taken on a direct debit, the CML says.

 

The reduction in housing costs caused by low mortgage rates has not yet been mirrored in reduced rents (why not?? Logic tells me it should be). Therefore, other things again being equal (which they never are) a tenant is more likely to be tempted to solve a short-term cash-flow problem by paying the rent with a credit card.

 

Is the story true?

 

“In the current climate”, I would not be surprised if there has been an increase in the number using cards. But has the increase really been 50% in a year? That’s massive. What they say, if you read the various reports, is that it’s gone from 4% to 6% and that is indeed an increase of 50%.

 

Firstly, you’d have to ask how big was the sample; obviously they didn’t interview everyone in the country (well, they didn’t ask me, anyway). And secondly, here’s a bit of a giveaway. Last year’s survey calculated the number of households, rather than individuals, that fell into this category. However, “the figure for households has not been calculated this year”, according to the report. So are we comparing apples with oranges, to make a point?

 

So is it safe to pay with a credit card?

 

Back to the question at the top of this post; is it safe to use a credit card to pay your rent or (less likely) your mortgage? The answer is a cautious yes, but only under certain circumstances. Credit cards do not have the astronomically high interest rates of payday loans, but the principle is the same. IF there is no alternative, and IF you are 100% sure you can pay off the card in full before the interest kicks in (you have 4-6 weeks to do that) then fine. If not, then as I have said many times before … get help from one of the debt advice agencies (for example Citizens Advice, or Consumer Credit Counselling Services, or National Debtline) and put together a plan. If you don’t, you could find yourself on a slippery slope.

 

I’ll be following up this story. “Watch this space”, as the saying goes.

 

 

 

WANT TO KNOW MORE?

 

Here’s a piece on the website of Shelter, who produced the original report:

 

http://england.shelter.org.uk/news/january_2011/2m_pay_for_home_on_cards

 

And here’s an item about the story on the BBC website:

 

http://www.bbc.co.uk/news/business-12120937

 

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My book “Back to the Black: how to become debt-free and stay that way” is now available to sample or buy, as a multi-format e-book, at: http://www.smashwords.com/books/view/22886

 

PAYDAY LOANS: RECENT MEDIA COVERAGE

Lots of stuff about payday loans in the media just recently. I’ve mentioned on my Twitter feed that the subject was featured in “Broadcasting House”, one of my very favourite programmes on BBC Radio 4, yesterday morning.

I thought that in several ways the programme presented a balanced view. Rather than simply saying “these loans are terrible and should be banned because of their outrageously high interest rates”, at least one interviewee said that the amount paid (and it’s generally small, as it’s generally on smallish loans) could well be less than what the bank would charge you for going into (unauthorized) overdraft.

A fair point and another reason why people would be tempted. I’d previously said in my last post (at the back end of last week) that these kinds of loans could be considered in emergency, provided you also put a plan in place which ensures that you repaid the loan at the next payday .

High interest charge … or a bank charge? Maybe both

However, there is a comprehensive article on this by Matthew Wall in ‘Moneywise’ magazine (November 2010). The article points out something else, which adds a further danger to what’s already known about these kinds of loans.

He says: “Lenders usually take your debit card details as part of the application process so they can take out the full repayment come payday. They’ll do this whether you have the money in your account or not, potentially pushing you into overdraft and triggering bank charges if you don’t.

In this situation it’s a double whammy; you’ve paid the payday loan company’s interest rate (which is well known to be very high) but then you are stung with the bank charge anyway.

Matthew Wall goes on:

If you can’t repay the full amount you can ask to defer the loan, but they’ll usually insist you at least pay the borrowing charges.

There may also be a deferral fee or a charge incurred for arranging the new loan. So it’s not hard to see how cash-strapped borrowers can quickly become submerged in debt.”

Want to know more?

1. To see the whole of Matthew Wall’s article, go to: http://www.moneywise.co.uk/cards-loans/personal-loans/article/2010/11/03/beware-offers-easy-credit

2. My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886

PAYDAY LOANS: FRIENDS IN NEED OR WOLVES IN SHEEP’S CLOTHING?

Earlier this year, during an interview on Heart FM, I was asked about payday loans: would I advise anyone who was especially cash-strapped (for example as a result of Christmas), to take out one of these loans? This is a tricky matter: anyone considering any such loan must have exhausted all other possibilities.

Payday loans, usually for sums up to £1,000 ($1,500), are known to carry very high interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid quickly, i.e. on payday, but if it’s rolled over then the problem starts. However, they are marketed as being instantly available, which of course is very attractive when things are tight.

Advantages

So the attractions are:

• Instant availability, even if you have a poor credit record
• Lack of bureaucracy, with a simple application method
• The fact that it’s cash: a cheque is less useful if you have to pay it in to a bank account with a maxed-out overdraft, though of course cheque / cash converter shops have foreseen that problem.
• The fact that it’s local, with a collector who probably lives near you.

If there is no alternative, and if the sum borrowed is repaid at the next payday, then paying that interest (high rate but small sum) is better than having to default on the mortgage or a credit card bill.

Disadvantages

The problem arises, of course, if the sum isn’t paid quickly. Then, of course, it will become more and more difficult to repay, because of that very high interest rate. I could publish a table showing how the sum owing would build up at those very high interest rates: but that would be very depressing for you and for me.

Should you do it?

In the radio interview I said that if anyone was in a situation where they saw no alternative solution, then they should take the loan, provided they immediately got help from one of the debt advice charities, for example the CAB (Citizens Advice), or CCCS (Consumer Credit Counselling Services), or National Debtline, or one of the many local “not-for-profit” debt advisory services, and put together a plan. Step one of that plan must be to repay the payday loan as a first priority.

I still stand by that advice.

Those interest rates, by the way

In order to check my facts after that interview, I found a website that lists the top 5 payday loan providers (the “top 5” ranking is by “rough estimate of lender’s approval rates”). I found the APRs of these lenders varied from over 990% to over 2300%. Eye-watering stuff, if you can’t repay quickly.

For extra info see the MoneySavingExpert website, for example this post:
http://www.moneysavingexpert.com/news/loans/2010/01/loan-sharks-leaving-victims-in-debt-all-year . That article talked about interest rates (APR) “up to 1500%”. As you can see above, I found some rates to be even higher.

Credit Unions: an alternative

Credit unions are an alternative and much cheaper source of short-term finance that people in this situation could look at: an alternative, in fact, to high-street lenders as well as to payday loans.

The local one here in Bristol, for example, is at http://www.bristolcreditunion.org/; they offer loans from £100 to £7,500 ($150 to $11,250). Their website says: “By law credit unions cannot charge any more than 2% per month on the reducing balance of a loan. This represents a maximum interest rate of 26.8% APR (Annual Percentage Rate), and that is the most you will ever pay on your loan.”

Worth checking out? 26.8% sounds better than those payday loans.

Taking advice

If you are in debt, and whether or not you are considering a payday loan, I always bang on about the need to get help as soon as possible. That should preferably come from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (that’s the Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the UK) or CCCS (Consumer Credit Counselling Service) or National Debtline. Then you need to formulate a plan with the help of that advice, and inform the creditors that is what you’re doing and ask them to freeze interest while that’s happening.

Many creditors will agree to that, but if you don’t ask you don’t get. Many debtors spend too long in denial and they don’t communicate with their creditors, which makes the situation worse. I know: I was one of those.

In fact my book’s subtitle could even be “Learn from my mistakes”.

Christmas is coming!

At the top of this post I mentioned Christmas. This is a good time to say that one way of avoiding payday loans is to cut down spending. Don’t cut down on the fun but do cut down on the presents!

As I say in my book: “Christmas is not an emergency.” (it comes every year)

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“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook at Smashwords to sample (view or download the first 20% free) or to buy at only $3.99. Go to: http://www.smashwords.com/books/view/22886

Website: www.back-to-the-black.com

Blog: http://backtotheblackblog.wordpress.com

"BACK TO THE BLACK" UPDATE

Yesterday I was working with Jenny Layton, who’s giving me fantastic help with the text-editing of Edition 2 of “Back To The Black”, i.e. the complete content as an e-book. I am still hoping we’ll get the file uploaded by the end of February.

After that the next project will be a podcast and an audio version of the complete book.

This morning I did another interview with Heart FM, this time with Rob Mayor. This came about because Heart felt that the issue of “Payday Loans” needed exploring further. We talked about why people are tempted by such loans, the benefits on which they are sold, and the well-known disadvantages of the astronomical interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid really quickly, i.e. on payday, but if it’s rolled over then the problem starts.

We talked about credit unions as an alternative to high-street lenders or to payday loans.

I also stressed the need to take advice, preferably from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the UK) or CCCS (Consumer Credit Counselling Service) or National Debtline. Then the need to formulate a plan with the aid of that advice, and to inform the creditors that is what you’re doing and ask them to freeze interest while that’s happening. If you don’t ask you don’t get, but many debtors spend too long in denial (and I was one) and don’t communicate, which makes the situation worse.

All this is the kind of advice that most people have read lots of times; however, my hope is that when the complete book is published, people will view the advice in a different light because of what I say about where I went wrong. In fact the book’s subtitle could even be “Learn from my mistakes”.