A new piece by Simon Read of The Independent reveals strategies used by retailers to make us spend more at Christmas. Awareness could help us budget. Karyn Fleeting in Moneywise earlier this year wrote in similar vein re grocery shopping. Continue reading
Payday lenders are the current target of regulators. The cap being introduced in January will force nearly all of these firms out of business, claims the FCA. Continue reading
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.
Payday loan providers have attracted column inches from many writers, including yours truly. Now these firms have been summoned to a “summit” hosted by Government ministers.
Will concrete action follow?
Here’s a précis of a story in the Independent today.
Payday lending: adverts to face ban?
Payday lending advertising could be banned, under hard-hitting new rules being considered by the new City Watchdog the FCA.
The high-cost credit industry (that’s a new term to me) also faces a crackdown on the number of times they can rollover loans; and they may be forced to introduce time-lags, so borrowers don’t end up choosing a lender on the basis of how quickly it can get the cash.
This emerged from a Westminster summit yesterday. Consumer Minister Jo Swinson, who hosted the summit, said there is a need to control the number of loans borrowers are allowed to take out. She intimated that lenders could be forced to set up a central register of borrowers to cut the practice of multiple loans. One borrower reportedly had 34 different loans at the same time.
Ministers were told of far-reaching proposals that could ban daytime adverts on television that target the unwaged and vulnerable people. However the FCA’s Martin Wheatley didn’t rule out a blanket ban on lenders. “That power will be available to us,” he said.
Delroy Corinaldi of debt charity Step Change called for all payday loan advertising to carry a health warning that includes information about the risks of using high-cost credit. “In particular, companies must be clear that loans need to be realistic and affordable and are not a way to deal with long-term financial problems,” he said.
Citizens Advice’s Gillian Guy was keen to see new action on advertising. “Payday lenders need to be clear about who they are targeting. We see daytime television adverts with glamorous celebrity endorsements, targeted at the unemployed and those on low incomes.”
The FCA also announced at the summit that a consultation will be launched in September to decide its approach to controlling payday lenders.
However Richard Lloyd of Which? said: “Positive noises about tough new rules have come out of the summit … but these must now be backed up with more concrete actions than we’ve seen today.”
DO YOU WANT TO KNOW MORE?
Here’s the full story from The Independent.
Here’s my last post on this issue.
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:
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.
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
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
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
Debtors Anonymous (worldwide community with telephone & online meetings)
… and to find contact details for local meetings inUK:
Mind (charity & helpline that helps with mental health problems)
0845 7660 163
Samaritans (confidential emotional support)
0845 790 9090
Saneline (support for mental illness)
0845 767 8000
Shelter (free housing advice helpline)
0808 800 4444
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
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
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:
“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/
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.”
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)
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.
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:
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