PAYDAY LOANS TO BE CAPPED

Yesterday’s big story on the personal finance front was the Government’s announcement about capping payday loans.

My first reaction was to look up Simon Read of the Independent, because he’s been a leading campaigner for regulation of the payday loans sector.

His article, in yesterday’s issue of the paper, reports on what was being said by the politicians; some predictable sparring there. I was more interested in Simon Read’s own overview of how effective these measures would be, so I went straight to his summary at the end. No apologies for reproducing it here.

 

Q&A: What should be done?

Q: Will a cap on the loans help people avoid falling into debt problems?

A: No. The key issues surround the widespread lack of  responsible lending.

Q: How could payday lenders be more responsible?

A: One option would be to  introduce compulsory  affordability checks. Lenders often make greater profits from rolling over loans than from the original deal.

Q: How should they be stopped?

A: The regulators have already announced plans to cut back the number of rollovers allowed and the number of times lenders can try and recover their cash from  people’s bank accounts. But their advertising also needs to be restricted.

(Simon Read)

 

PAYDAY LOANS IN THE FIRING LINE AGAIN

Payday lender Wonga has increased its APR by 1600%! It was already eye-wateringly high; it’s now 5853%, according to The Guardian.

That’s prompted lots of media attention and calls for increased regulation. No surprise there.

Simon Read has campaigned extensively on this. In his recent piece in The Independent , he says we don’t need to ban payday loans, just ensure that anyone taking one out should have chosen to do so, rather than “being flogged a deal they can’t afford.”

How do we ensure that? Anyone contemplating such a risky step should get good and impartial advice about their options; and should take a little time before deciding, instead of being rushed into a decision. However, these loans are by definition emergency loans: the borrower either has, or thinks they have, no alternative and no time.

I would never recommend payday loans; but banning them or capping rates would remove, or at least limit, a finance source that for some borrowers and some situations might be the only alternative. More and better advice is probably the answer.

DO YOU WANT TO KNOW MORE?

See some of my previous blog posts on this thorny subject:

HIGHER EARNERS USE PAYDAY LENDERS TOO

SHOULD PAYDAY LOAN FIRMS “FACE INSTANT CLOSURE”? YES AND NO.

“ACCEPTABLE FACE OF PAYDAY LOANS”?

PAYDAY LOANS IN THE NEWS AGAIN

 

DEBT AND DEPRESSION

In my book “Back to the Black”, I talk about the psychological effects of being in debt. In fact Chapter 2 is entitled “Mind Over Matter.”

I was pleased to see that this important issue was covered in a recent article by Simon Read in “The Independent” (17 March 2012). I’ll take the liberty of paraphrasing:

*****

Being in debt is a depressing experience.

“A trouble shared is a trouble halved”; but the annual report of Consumer Credit Counselling Service (CCCS) shows 25% of those in debt don’t share their troubles with friends or family.

It’s understandable that people don’t want to discuss their debt problems. They’re embarrassed that they might be judged.

Admit the problem; don’t delay

However, admitting you’re in financial trouble is the first step towards solving the problem.

CCCS also revealed that 45 per cent of people delayed seeking advice for more than a year after they started to worry they had a debt problem. Many of them had probably carried the worry alone.

Suicides

Many tragic suicides are caused by the worry of debt (and for every suicide there are ten attempted suicides). If those people had been able to talk about their problems, who knows what kind of future they may have had?

Talk to someone

Don’t just worry about debt. Instead look for a way to deal with it. There are many people and organisations that can help.

Help is at hand

CCCS (and the other debt advice charities: see below) are on hand to help.

All of them can help those in debt find ways to put their finances back on track.

Friends and family

Just talking to friends and family could be a good first step on the way to coping with the deep anxiety that money worries cause.

*****

I had intended to add some thoughts of my own to this; but I think that the article says what needs to be said. I’ve just added information about organisations that can help; see below.

*****

 WANT TO KNOW MORE?

 ADVICE ORGANISATIONS: CONTACT DETAILS

1. NATIONAL DEBT ADVICE CHARITIES

 (THESE ALL OFFER CONFIDENTIAL AND FREE DEBT ADVICE, UK-WIDE)

Citizens Advice (“The CAB”)

 Free advice provider; registered charity. Funders include central and local government, charitable trusts, companies and individuals.

Face-to-face interviews and telephone advice available at local Citizens Advice Bureaux (CABs). Find your nearest bureau in the phone directory, or search at www.citizensadvice.org.uk

E-mail advice available at some CABs

Advice line: 0844 499 4718

Online help also available: www.adviceguide.org.uk

CCCS (Consumer Credit Counselling Service)

Free advice provider; registered charity. Supported almost entirely by the credit industry.

Telephone counselling 0800 138 1111

Online help www.cccs.co.uk

National Debtline

 Free advice provider; registered charity. Part of the Money Advice Trust, (see below) funded by a mix of private sector donations and Government grants.

Phone advice and free factsheet orders: 0808 808 4000

www.nationaldebtline.co.uk

Credit Action

Money education charity, in partnership with CCCS (see above). Free online advice provider, plus the Spendometer (see Chapter 8), Money Manuals and other resources: www.creditaction.org.uk.

Their “Money Advice Map” signposts to local debt advice centres: www.moneyadvicemap.com/

***

 2. LOCAL INDEPENDENT DEBT ADVICE ORGANISATIONS ALSO EXIST IN MANY AREAS AND ARE TOO NUMEROUS TO LIST.

***

 3. OTHER ORGANISATIONS WITH HELPLINES OR WEBSITES ON DEBT AND RELATED ISSUES

 

AdviceUK (to find a local money advice centre)

020 7407 4070

www.adviceuk.org.uk

 

Debtors Anonymous (worldwide community with telephone & online meetings)

www.debtorsanonymous.org/

… and to find contact details for local meetings inUK:

www.debtorsanonymous.org.uk/

 

Mind (charity & helpline that helps with mental health problems)

0845 7660 163

www.mind.org.uk

 

Samaritans (confidential emotional support)

0845 790 9090

www.samaritans.org

 

Saneline (support for mental illness)

0845 767 8000

www.sane.org.uk

 

Shelter (free housing advice helpline)

0808 800 4444

www.shelter.org.uk

***

For the “Independent” article in full: LINK

***

For info about my book “Back to the Black: how to become debt-free and stay that way” (paperback and eBook): LINK

 

“ACCEPTABLE FACE OF PAYDAY LOANS?”

In my last post I referred to an upcoming interview on BBC Radio 4’s “The World This Weekend” with Muhammad Yunus, the Bangladeshi economist and Nobel Laureate.

35 years ago he more or less invented microfinance (or microcredit or microloans, whatever you want to call the idea). The occasion: Yunus’ brainchild Grameen Bank (the name means “Village Bank”) was about to open its first UK branch, inGlasgow.

Since then I’ve heard the interview – several times, thanks to the BBC’s wonderful iPlayer – and I am just as much a fan of Yunus as I was.

Grameen Bank’s model

Grameen’s loans are for small amounts; they are short-term and unsecured; they tend to be to poorer, “non-creditworthy” people. In the early days especially, in many cases they were to self-employed women, to get loan sharks off their backs. However, some critics have said that Grameen also charged high interest rates; and two years ago some microfinance lenders (not Grameen) were shut down by the authorities in the Indian state of Andhra Pradesh.

So naturally I thought I needed to test my opinion. In the past I’ve been critical of the UK’s growing “Payday Loans” industry with its very high interest rates; many financial journalists have urged the Government to outlaw them, especially Simon Read in the Independent. So … was microfinance just a payday loan with the added credibility of a Nobel Laureate / economics professor? Was this just the acceptable face of payday loans?

In my view; it’s not the same thing at all. The interview, and what I’ve read since around the subject, has confirmed me in the view. Although Grameen has not existed in the UK up to now, we do have credit unions, which are comparable in many ways.

Soundbite time …

Here are some soundbites that give a flavour but I urge you to listen to the BBC piece in full.

Shaun Ley (Presenter, “The World This Weekend”): “A crisis has gripped capitalism … here’s Muhammad Yunus, one of the world’s leading economists.”

 “Grameen encourages small entrepreneurialism”

 Professor Pamela Gillies (Principal and Vice-Chancellor, Glasgow Caledonian University; and Prof. Yunus’s host here): “this reminds me of self-help groups I’ve seen in Dundee.”

 Vox pop, asked about the possibility of bad debts: “if I owe money to several people including a credit union… I feel part of the credit union, so I’d pay them first.”

 US author David Roodman: “the microfinance model appeals to both left and right, despite limited objective evidence that it transforms lives.”

 Yunus: “If the microfinance industry grows too fast, you can get a bubble, as happened in Andhra Pradesh.”

 Prof Gillies: “If this works in Glasgow it could work everywhere in the UK”

 Shaun Ley: “Should we encourage people to take on debt?” Yunus: “We don’t encourage, but we say if you are stuck, we can help. Our loans are all for the purpose of income generation. Our aim is to facilitate.”

 Ley: “What happened in the Indian state of Andhra Pradesh?” Yunus: “We have no intention of making money from microcredit. Others found this profit source attractive, got backers onboard through an IPO, and were aggressive in promoting loans. That was a derailment of the original idea. Making money out of poor people is not a new idea – that’s what loan sharks have been doing for years.”

 Yunus (asked about the microfinance industry in general) “If I could concentrate on Grameen specifically; we are owned by our borrowers. Two thirds of the money we lend comes from our borrowers.”

In conclusion …

Yes, Prof. Yunus and Grameen Bank may well have come in for criticism. Anyone who challenges financial orthodoxies and massive vested interests for 35 years will attract opposition. But it’s fair to say that the West’s banking sector has not covered itself in glory recently. Thus anyone who tries to develop an alternative financial model, especially when they do it from what seems to me an altruistic motive, deserves respect and support.

I’ll certainly be following the progress of the UK’s first Grameen Bank branch with interest; but I’ll also be following other alternative finance sources that are already established in the UK, e.g. credit unions and peer-to-peer lenders such as Zopa.

Watch this space!

 

WANT TO KNOW MORE?

 BBC interview with Muhammad Yunus; available only until Sunday 18 March 2012 at 12.59: http://www.bbc.co.uk/iplayer/console/b01d24ym (starts at 16 mins)

Grameen Bank: http://en.wikipedia.org/wiki/Grameen_Bank

Glasgow Caledonian University, Yunus visit: http://www.gcu.ac.uk/newsevents/news/article.php?id=40898&c=126

Daily Telegraph, Nick Stace, “Yunus resigns from Grameen Bank”: http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/8511461/Muhammad-Yunus-resigns-from-Grameen-Bank.html

The Independent, Simon Read, “Time to crack down on payday loans”: http://www.independent.co.uk/money/spend-save/simon-read-time-to-crack-down-on-payday-loans-7547420.html

 

 

PAYDAY LOANS IN THE NEWS AGAIN

I appear to be stalking Simon Read of The Independent. If so, that’s because payday loans are again in the news and this is a story and a cause he has taken up and because he writes well on the subject.

The latest twist in the story: research by Shelter (a UK housing charity) reveals around seven million people are turning to credit to try to keep a roof over their heads.

A million use payday loans to cover rent or mortgage

In the past year alone, almost one in seven of those – i.e. just under one million people – have resorted to payday (i.e. emergency) loans to cover rent or mortgage payments.

The Independent has warned that payday lenders are cashing in on the struggles of millions who are unable to borrow from mainstream lenders and those companies charge interest rates of up to 5,000 per cent.

The impressive Campbell Robb, CEO of Shelter, said that this “… shows the extent to which millions of households across the country are desperately struggling to keep their home.

“Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and to eviction or repossession and ultimately homelessness.”

 What’s the alternative?

I cannot disagree with anything that’s been said above. It’s a sad state of affairs and I’ve no doubt payday loan companies in general are cashing in on the misery, despite what was said by the boss of Wonga to Simon Read and which I reported in an earlier post. There have been calls for these firms to be outlawed. But for the people who feel they have no alternative, what will they do if that happens?

Anyone in debt crisis who consults an adviser at one of the debt charities – such Citizens Advice or National Debtline or CCCS, here in the UK – would probably be told to avoid payday loans. But I wonder how many of the million people mentioned in Shelter’s report have actually talked to such an adviser.

I know that these resources are stretched; and as the charities reply to some extent on grants from the public sector, they may well become even more stretched because of spending cutbacks.

Need for financial advice

I don’t know the full answer – and of course it’ll be different in every case – but wider access to free, impartial and high-quality financial advice must be part of it. What’s more, financial education has to have a higher priority than it does now.

WANT TO KNOW MORE?

For the Simon Read article (4 Jan) click here:

For information about my book “Back to the Black”, click here:

 

 

 

 

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/

CREDIT CARD DEBT: FACING THE WORST OR BLISSFUL IGNORANCE?

In my last post on the subject of debt, I quoted an article by Simon Read in The Independent, where he urged people to “ditch the plastic” before they were “forced into distressed borrowing”. I think his story was repeated over several editions of the paper, with the most memorable headline being “Maxed-out Britain.”

Case study

What I didn’t say was that there was a case study attached to the article. It was the story of Catherine Hughes, who had major surgery that left her too ill to work, so that she and her husband – with four children – lost 50% of their household income.

[The case study isn’t available online, so you’ll have to take my word for it.]

Catherine was a freelance writer, her husband a heating engineer; because the family income fluctuated a lot, they had been using credit cards to finance the peaks and troughs.

Card providers unhelpful

They had debts with three credit card companies; that’s a relatively prudent and small number, compared with some people, e.g. yours truly when I went through my debt crisis ten years ago.

Two of those companies had cut off credit and all three have been very unhelpful, says Catherine.

Facing the worst?

Catherine went on: “They hold all the power. We try to stay positive and are doing the best we can but if I were to sit down and add the debts up, that would probably reduce me to tears.

“If the card companies would look at our situation on a more personal level [that would help]. We’d welcome a reduction in the interest rates.”

“Banks and card lenders should be more willing to work with people instead of … coming down on them like a ton of bricks [when they can’t meet the payments]. There should be a middle ground; but our experience shows that there is not.”

Interest rates: all-time low for whom?

Catherine mentioned interest rates. This morning on the radio I heard Mark Hoban, who is Financial Secretary to the Treasury here in the good old UK. When challenged about how he could counteract the slump in consumer confidence, he pointed to the fact that his Government had been successful in keeping interest rates at an all-time low.

If you talk of the base rate, that is true: 0.5% for a long time now. (Although some would say that because the rate is now set by the independent Bank of England Monetary Policy Committee, the Government can’t take credit for it)

Rate inflation

Now I don’t know what rate Catherine and her husband were paying on their cards but I know for sure it wasn’t 0.5%.

It was probably 15% or more; much more than 15% if any of them were store-cards. Go figure, as you guys say, I think, on the other side of “the pond”. Admittedly, if they were owner-occupiers their mortgage would have been much cheaper than before. The paper didn’t say whether they were home-owners or tenants. If the latter, the knowledge that our base rate is only 0.5% would be a sick joke for that particular family.

Can you face the facts? Should you?

Catherine had said that she’d be reduced to tears if she sat down and added up the debts. Well, I don’t want to bring more tears into her life but I do advise in my book “Back to the Black” that it is generally helpful – and I stress generally; no two cases are identical – to do exactly that. I found this out myself, when I owed money to 26 different creditors at the height of my money problems. I had a rough idea of the total but it was only a rough idea and there was a very heavy Sword of Damocles hanging over me. When I eventually bit the bullet (sorry about the mixed metaphors, lethal-weapon-wise) and sat down to make a detailed list of amounts, credit limits (many of which I had already exceeded) and interest rates, it was therapeutic. I felt much less stressed when I knew the worst.

It worked for me; I don’t say it works for everyone but if you think you can handle it, it’s a step I recommend. After all, you can’t start to make plans about how to solve the problem until you know the scale of it.

Debt-free Christmas?

In my last post I mentioned the US blogger Brad Chaffee and his “Debt-Free Christmas” discussion. It seems an impossible dream … but I plan to write more about this very soon.

 

WANT TO KNOW MORE?

For Simon Read’s article in the Independent, 6 Nov 2011:

http://www.independent.co.uk/money/spend-save/simon-read-ditch-the-plastic-before-youre-forced-into-distressed-borrowing-6257400.html?origin=internalSearch

For info on my e-book “Back to the Black: how to become debt-free and stay that way”:  

Kindle version: http://www.amazon.com/dp/B004PLMAQM.

Other versions: http://www.smashwords.com/books/view/22886

DEBT-FREE CHRISTMAS? YOU MUST BE JOKING …

A couple of recent stories by Simon Read in the UK’s “Independent” newspaper  (see below) reveal that UK consumers are once again extending their credit card debt, after a period when the trend seemed to be reversing.

What’s more, they are using cards not for luxuries (i.e. “discretionary spending”) but on essentials.

Christmas is coming: the debts are getting fat

The situation for many of those “hard-working families”, as our politicians like to call them (surely that’s discrimination against single people and lazy people?) will probably get worse in a month or two. Why? Not just because of the underlying economic situation and rising inflation, but because of the “retail eternity” (to quote my hero Loudon Wainwright III) that we call Christmas.

Peer pressure

 We have been conditioned to believe that one can’t celebrate Christmas properly without spending a load of money. So those in debt are going to get deeper in debt. If you have young children, peer pressure and the blandishments of advertisers will try hard to ensure it.

US blogger promotes debt-free Christmas

That’s why I gave three hearty cheers when I found that an American blogger called Brad Chaffee had started a discussion thread called “Debt-Free Christmas”. I communicated with Brad and told him how much I liked the idea; he got back to me promptly, saying that the concept was very much alive and well in his family, even if the blog thread is less active right now.

Practical solutions?

What I take as the meaning of his “Debt-Free Christmas” was not so much to get right out of debt at this time of year – that would be a very tough aspiration – but how to find practical ways of having a great Christmas without getting further into debt; despite inflation and peer pressures.

Gift spend limit

In future posts I’ll be talking about how we’ve done it in my family. The most successful method was putting a limit on the gift spend per person. That forced a rethink, compared with the previous procedure of: “Oh God, only a week to go and I haven’t finished my gift shopping; must throw some more money at the problem”.

The new rule didn’t just save money, it unleashed lots of creativity.And we had just as much fun, maybe more.

Over to you

I’d like to throw this open. All contributions welcome!

 

WANT TO KNOW MORE?

 

For Simon Read’s article in the Independent, 6 Nov 2011:

 

http://www.independent.co.uk/money/spend-save/simon-read-ditch-the-plastic-before-youre-forced-into-distressed-borrowing-6257400.html?origin=internalSearch

 

For info on my e-book “Back to the Black: how to become debt-free and stay that way”:  

 

Kindle version: http://www.amazon.com/dp/B004PLMAQM.

Other versions: http://www.smashwords.com/books/view/22886

CALL FOR MORE FINANCIAL ADVICE

Today I read a great piece from Simon Read of the Independent, calling for the wider availability of financial advice. I posted a comment as follows:

_____

Great piece! More strength to your pen! I absolutely support your call for wider availability of quality financial advice; ten years ago I narrowly avoided personal bankruptcy and found a better solution with the help of two excellent advisers at the local CAB; but not everyone is as lucky and I know what the queues are like at the CAB in Bristol.

Have RTed your tweet.

I too quoted Mr Micawber in a book about my debt experiences (“Back to the Black: how to become debt-free and stay that way”). The version of Micawber I used was worded slightly differently from yours, in that mine was income / expenditure, ending: “Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.”

The debt-to-income comparison you mention is interesting. I found some alarming debt / income ratios in the Times a year or so back, which I interpreted in my book as follows:

As Credit Action’s website succinctly puts it: “Individuals owe more than what the whole country produces in a year.”

The trend of increasing personal indebtedness, a by-product of our consumer culture, certainly contributed to the financial crisis.

In early 2010, a typical UK household containing one wage-earner on average pay has, according to the Halifax (a division of the Bank of Scotland plc), outstanding mortgage debt that’s equivalent to 507% of income (i.e. of the ONS figure for average annual income). By way of comparison, the UK Government’s ratio of debt to income – a ratio that was widely castigated as unsustainable during the election campaign of spring 2010 – was “only” 170%. (“Worried about national debt? Mr & Mrs Average are in a far worse state”: Ian King, Deputy Business Editor, The Times, 19 Feb 2010) Go figure, as my American friends might say.

Most personal debt is of course, at least in the UK, secured mortgage debt: levels of home ownership have traditionally been higher here than in most other European countries. It has always been considered that mortgage debt is safe debt; that was true for as long as the housing market continued its customary rise but at times of recession in the housing market …. Etc, etc

One could also add the risk of rate increases leading to a rise in the numbers of mortgages in arrears, repossession or forbearance … a number that’s already high, as you mention.

 

WANT TO KNOW MORE?

To see Simon Read’s original piece (The Independent, 16 July 2011): http://www.independent.co.uk/money/spend-save/simon-read-rising-poverty-worries-means-advice-is-crucial-2314442.html

To sample or purchase (£0.70 / $0.99) my eBook on managing debt: