Tag Archives: debt

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

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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

DEBT COLLECTION: OFFICIAL GUIDELINES IGNORED

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An interesting article by Jenny Little (“Moneywise”, Nov 2010) reminds me of a problem that can cause great misery for personal debtors. The Office of Fair Trading (OFT) has a ruling that prohibits harassment of debtors. Moreover the OFT clarifies what constitutes harassment by publishing guidelines; however, many lenders ignore them.

According to the article, in some cases lenders have even claimed to be unaware of the guidelines, though it’s the OFT that issues those same lenders with their consumer credit licences.

To see the article, go to: http://www.moneywise.co.uk/cards-loans/credit-cards/article/2010/10/25/credit-card-demons-revealed

Little says that “growing numbers of people struggling with credit card payments complain of creditors bullying them with menacing letters, doorstep visits and threats of court action or repossession.

“In public, credit card and debt collection firms pay lip service to official guidelines protecting consumers, but staff are given financial incentives to recover debt, provoking the sort of harassment that makes millions of debtors’ lives a misery.”

Official guidelines

OFT guidelines require lenders to negotiate with third parties, e.g. debt management companies, and say that debt collectors must give advance notice of visits. Debtors can also request not to be contacted at work.

Debt collection firms pretending to be bailiffs, or falsely threatening criminal proceedings, also risk being fined or having their credit licence revoked.

The guidelines in full:

Physical/psychological harassment: putting pressure on debtors or third parties is considered to be oppressive. Examples of unfair practices are as follows:

• contacting debtors at unreasonable times and at unreasonable intervals
• pressurising debtors to sell property, to raise funds by further borrowing or to extend their borrowing
• using more than one debt collection business at the same time resulting in repetitive and/or frequent contact by different parties
• not ensuring that an adequate history of the debt is passed on as appropriate resulting in repetitive and/or frequent contact by different parties
• not informing the debtor when their case has been passed on to a different debt collector
• pressurising debtors to pay in full, in unreasonably large instalments, or to increase payments when they are unable to do so
• making threatening statements or gestures or taking actions which suggest harm to debtors
• ignoring and/or disregarding claims that debts have been settled or are disputed and continuing to make unjustified demands for payment
• disclosing or threatening to disclose debt details to third parties unless legally entitled to do so
• acting in a way likely to be publicly embarrassing to the debtor either deliberately or through lack of care, for example, by not putting correspondence in a sealed envelope and putting it through a letterbox, thereby running the risk that it could be read by third parties.

Source: Office of Fair Trading, “Debt collection guidance: final guidance on unfair business practices.”

Lenders ignoring guidelines

But it seems the guidelines carry little weight with the lenders, according to Little. Heather Keates, chief executive of Community Money Advice, says: “Card firms are jittery and increasing interest rates. Creditors now go in hard from the outset.”

Citizens Advice (CAB) gives the example of one client’s recent experience. A 42-year-old single mother, she was struggling to keep up with a £7,000 credit card debt on her £589 take-home pay. She made the minimum payments but, when she defaulted, her bank began to phone her up to six times a day, even at work.
When the CAB intervened, the bank’s representative claimed to know nothing of the OFT guidelines and blamed the repeated calls on an automated system.

Automated dialling systems

Little has found that the use of automated dialling systems is commonplace and can result in customers receiving multiple calls every day. Some people resort to buying an extra pay-as-you-go mobile just to avoid harassment.

Alex MacDermott of Citizens Advice said: “It’s always better to talk to the card provider; otherwise your number will stay in the automated dialler, which will keep ringing. But the tone of some calls can be very threatening.”

Mention of telephone harassment and automated dialling reminds me of my own experience when I was in debt. That’s why I say: “try to avoid talking to creditors by phone. Don’t ignore them; respond to the messages … but in writing. Let all your incoming calls go to voicemail, if you are single-minded enough to do so.”

While some providers employ in-house debt collection, others ‘sell on’ debt to a third party. The Consumer Credit Act requires that they first issue a default notice to customers who have skipped payments to inform them which company has taken on the debt but in my experience this rarely happens.

The OFT has criticised debt collection agencies for “making frequent phone calls, threatening court action and not describing the process correctly”, and has also concluded that many default charges are unlawful. It says that £12 is the maximum that anyone should be penalised for missing a payment.
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What to do

As I say again and again in my book: get help, especially if you are being harassed. Apart from the three major national debt advice charities Citizens Advice (CAB), Consumer Credit Counselling Service (CCCS) and National Debtline, there are also Community Money Advice and Debtors Anonymous, as well as Consumer Action Group, which is an online support network. All of these are easily located online. There are also local advice centres, too numerous to mention.

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“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

HOW DO WE MEASURE GROWTH?

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I loved the contribution by Caroline Lucas, our only Green MP, on “The Week in Westminster” (BBC Radio 4) yesterday (13.11) morning. I am not a supporter of her party, nor am I that well informed on the green agenda, but every time I hear her speak I am impressed. She talks a lot of sense; moreover in a courteous way, even when confronted with the leading questions beloved of interviewers, such as this one: “ … are you not coming to the conclusion that you alone can make no difference …?”

The Commons had been discussing economic growth; Ms Lucas wanted the debate to be wider but felt she was the only MP who believed we should look at the quality of growth. She went on to say: “How useful is GDP as a real measure of that growth? Are we better off?”

I agree totally. To take solely the relationship between GDP and jobs, I wrote in a blog post on 27 October, when a higher-than-predicted monthly GDP growth was in the news: “However … a growth in GDP does not necessarily – and quickly – improve the lot of the majority of people in this country, particularly those who are already in debt or who face losing their jobs as a result of the recently-announced spending cuts. Our economy is still rather dependent on relatively non-labour-intensive sectors, e.g. financial services, so today’s good news is “necessary but not sufficient”.

Can you measure happiness?

So Caroline Lucas asks, “are we better off?” Back in “the good old days”, i.e. before the credit crunch and the recession, there were several studies (including those quoted in Oliver James’ famous book “Britain on the Couch”) showing that British citizens’ self-perceived levels of happiness (or contentment or well-being, call it what you will) had not increased over the previous 50 years even though, by every financial measure, we were indeed all greatly “better off”.

OK, let’s leave aside this hard-to-measure or even impossible-to-measure quality of happiness, or maybe the spiritual wealth of the nation if you like. Are there other measures than GDP with which we could assess the economic wealth of the nation? I don’t know the answer but I’d love to hear your views.

UK plc as a company: turnover? profit? What else?

For example: years ago, when I was in the chemical industry, I remember an Irish customer of mine saying, as his annual financial results were published: “Turnover is vanity; profit is sanity.”

Isn’t the GDP of a country somewhat analogous to the turnover of a company, being the sum of its outputs? So what might be the equivalent of profit for “UK plc”? What measures of “added value” could we track?

Obviously our government is supposed to do more than deliver profit to shareholders, so how best can it – and we – measure how good a job it is doing? As Ms Lucas’s question implies, GDP is not the only measure.

“Answers on a postcard”. As they used to say, back in the day.

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For a link to Caroline Lucas’s interview on “The Week in Westminster”, go to: www.bbc.co.uk/programmes/b00vv0dv#p00c4mrs
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For information on “Back to the Black: how to become debt-free and stay that way”, go to www.back-to-the-black.com

UK PERSONAL DEBT TRENDS

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My thanks to the charity Credit Action for their latest credit data.

Previously, on my blog …

The last time I blogged about this, I reported that the “write-off rate” on consumer lending by UK monetary financial institutions to individuals increased further in the second quarter 2010 to 7.4%. In that quarter, UK banks and building societies wrote off £3.47bn, most of which was credit card debt.
Secondly, Credit Action reported that average household debt in the UK was £8,590 (excluding mortgages). They went on to say that “this figure increases to £17,896 if the average is based on the number of households who actually have some form of unsecured loan.”

That second statement puzzles me; I don’t agree with the idea of giving a second average that includes only those who have debts. An average is an average, including the highs and the lows and everything in between. If we exclude those with the very lowest debts (i.e. zero), then we should also exclude all those with the very highest debts, i.e. all of the “outliers”.

By the way, if one included mortgage debt, then average household debt in the UK was then about £56,690.

The report concluded that total UK personal debt at the end of August 2010 stood at £1,428bn, a slight increase.

Now for the update

The latest Credit Action report, which I received last week, still gives the second-quarter figure for the write-off rate on consumer lending, i.e. 7.4%; presumably the third-quarter figure is not yet available.

Total lending in September 2010 rose by £0.4bn; secured lending increased by £0.1bn in the month; consumer credit lending increased but only by £0.3bn. (a step-change from pre-recession days: total lending in Jan 2008 grew by £8.4bn)

Total consumer credit lending to individuals at the end of September 2010 was £216bn. The annual growth rate of consumer credit increased 0.3% to 0.6%.

Average household debt in the UK is ~ £8,562 (excluding mortgages). Again, they add, “this figure increases to £17,838 if the average is based on the number of households who actually have some form of unsecured loan.” Again, I find that second figure rather artificial.

Total average household debt in the UK (including mortgages) is approx £57,737; that’s an increase but only a very small one.

Your debt or the country’s debt?

If you thought that figure was highish, the report goes on to say that “if you add to this the March 2010 budget report figure for public sector net debt (PSND) expected in 2015-16 (excluding financial interventions) then this figure rises to £109,960 per household.” Sorry, but that is rather a jump of logic; the PSND is not my personal responsibility, although I would indeed be worried if I thought Mr Osborne would send the bailiffs round to ensure I cough up my share of the UK debt. Thus I feel this excellent report is slightly compromised by making the raw data appear worse through this addition.

And another thing … that last calculation is based not on current government borrowing but the projection for 2015-16; a lot can happen before then. “Things can only get better”, as the song says; at least I hope they will. Let’s hope, in particular, that the PSND in five years is lower than that prediction.

Back to the present

Finally, and if we deal solely in current and personal realities, total UK personal debt at the end of September 2010 stood at £1,455bn; as you can see, that’s a further slight increase. Based on their latest report, the people at Credit Action can still make the same statement that I quoted in my book “Back to the Black”. In their words: “Individuals owe more than what the whole country produces in a year.”
It is sincerely to be hoped that this worrying statement will be short-lived, and that GDP will continue to rise and personal indebtedness will start to fall.
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To find out more about my new book “Back to the Black: how to become debt-free and stay that way”, go to www.back-to-the-black.com

ECONOMY GROWING FASTER THAN EXPECTED BUT PERSONAL DEBT WORRIES PERSIST

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The UK’s economy grew at 0.8% between July and September according to official figures from the Office for National Statistics (ONS). That growth is double the 0.4% expected by most analysts.

“This is the second major GDP growth surprise in a row and suggests that the UK economy is more resilient than many had feared,” said James Knightley, economist at ING.

“The government will no doubt take this as a sign that the private sector can fill the gap created by public sector cuts, but with consumer confidence, hiring intentions surveys and housing activity data all softening we remain cautious.”

The key is that phrase “hiring intentions”. I am a glass-half-full person, so I like to focus on the facts that the GDP increase is double what was expected and that it’s the strongest third-quarter figure in a decade, according to the BBC’s Stephanie Flanders.

However … a growth in GDP does not necessarily – and quickly – improve the lot of the majority of people in this country, particularly those who are already in debt or who face losing their jobs as a result of the recently-announced spending cuts. Our economy is still rather dependent on relatively non-labour-intensive sectors, e.g. financial services, so today’s good news is “necessary but not sufficient”.

Until those “hiring intentions surveys” also show a rise, there will still be large numbers of people going into bankruptcy or taking out an IVA (a Protected Trust Deed in Scotland).

I too was in that situation not so long ago. However I found another way, which I detail in my book “Back to the Black: how to become debt-free and stay that way.”

What is also encouraging is that construction seems to be showing the strongest gains in the last couple of quarters, as this would lead to job creation more than some other sectors.

To quote Stephanie Flanders again: “There is still plenty to worry about in this recovery: much of it beyond our shores, and beyond the government or the Bank of England’s control. But for today at least, I think we’re allowed to join the cabinet in a sigh of relief.”

Here’s a link to that Stephanie Flanders piece: http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/10/good_news_on_gdp.html

If you want to know more about how I personally escaped the threat of bankruptcy and IVA and found another way, go to www.back-to-the-black.com

CONSUMER CONFIDENCE INDEX

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Nowadays, consumer confidence is taken as an even more important barometer of the economic health of the UK than is any index of industrial output. That’s why it was rather depressing to read this morning that confidence is at its lowest level for more than a year, according to a monthly confidence index published by the Nationwide Building Society. This drop is, of course, in anticipation of the spending cuts to be revealed in the Comprehensive Spending Review next week.

Experts at the British Retail Consortium predicted that the figure would be “volatile” until after the impact of the cuts was known, which seems to me “a PhD in the bleedin’ obvious”. However when we actually look at the numbers, I wonder how meaningful is this “index” and the media coverage it’s had. The September index was reported by the BBC to have dropped by 9 to 53 in September. Thus a drop of 15%. In a month. By contrast, it rose 10% in August. Can both figures really be true? Of course I realise that recent announcements of planned cuts could have prompted a drop this large; however I have looked at the Nationwide website and it’s clear that this index fluctuates greatly almost every month. It was only 45 a year ago; moreover it was 100 only a couple of years before that, at a time when the credit crunch was already well underway. Surely a more meaningful measure of confidence is actual retail sales?

This is clearly a case for study by BBC Radio 4’s excellent programme “More or Less”, which looks more deeply at numbers in the news, especially when they might have been misrepresented (Can that really happen? Shock, horror!). Naturally, most of us know only what the media tells us about the impact of the cuts. For example, I thought I read at the start of the process that the spending reductions would be spread over 4 years or so; however, we never hear that fact nowadays. Whenever the media talk about, say, 25% cutbacks in departments that are not being ring-fenced, the stories give the clear impression that the cuts and the resulting job losses will be more or less immediate.

A related example: one of our allegedly serious papers carried an interview last week with a single mother who would be seriously affected by the recent decision to restrict total benefits payments to UK average income. The article clearly stated that Ms X would have to consider a move out of London, away from family and friends, “within the next couple of months”. However the benefit limit decision will not be effective till 2013; a fact that was not mentioned in the story. Why not? Could this omission be because bad news sells papers? Am I being too cynical?

Here’s my point: the tendency of many media outlets sometimes to oversimplify and usually to paint the worst possible picture of any new development adds further to the stress on people who are already in debt or who think they might be in the future. It’s important to put things in perspective and that’s something that’s hard to do after reading some of our doom-and-gloom media coverage. As that old French philosopher said (at least I think he was a French philosopher, but my information comes from the media), “my life is full of great disasters, most of which never happened”.

If you have concerns about your own debts, read my book “Back to the Black” about the necessity of putting your financial situation in perspective before deciding your response to any demands from your creditors; or any piece of bad news you read in the press.

UK DEBT STATISTICS SHOW WRITEOFF RATE INCREASING

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The latest UK debt statistics, courtesy of Credit Action, show two interesting trends.

Firstly, the “write-off rate” on consumer lending by UK monetary financial institutions to individuals increased further in the second quarter 2010 to 7.4%. In this quarter, UK banks and building societies wrote off £3.47bn, most of which was credit card debt. In the 12 months to the end of August, they wrote off £10.9bn of loans to individuals.

Secondly, they reported that average household debt in the UK is ~ £8,590 (excluding mortgages) but this figure increases to £17,896 if the average is based on the number of households who actually have some form of unsecured loan. That’s a drop from £22,000 when I last looked, about 6 months ago, which shows clearly that people have been paying off debt.

By the way, if we include mortgage debt, then average household debt in the UK is now about £56,690.

The report concluded that total UK personal debt at the end of August 2010 stood at £1,428bn, a slight increase. Based on that, the people at Credit Action still make the statement that I quoted in my book “Back to the Black”. In their words: “Individuals owe more than what the whole country produces in a year.”

PAYMENT PROTECTION INSURANCE – RECENT MEDIA COVERAGE

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In my last post I announced a new website dedicated to my eBook, “Back to the Black: how to become debt-free and stay that way”. You’ll find the site at http://www.back-to-the-black.com/

In the book I refer more than once to Payment Protection Insurance (PPI), about which I had a healthy scepticism based on personal experience. Ten years ago, my IFA persuaded me to take out PPI; after several hefty premiums, I discovered that, being self-employed, I would not have been able to claim from the policy. I complained of mis-selling, the policy was cancelled, I was promised a refund of premiums paid. I can’t recall ever getting that refund.

That was then. More recently, following lots of adverse media coverage, the whole PPI area was said to have been tightened up. Therefore, and in the interests of balance, I asked a practitioner who knows the subject to give me a current overview of the product. This he did and I included his comments in full within my book. Here’s what he said:

My view of PPI is: Very good product, where appropriate. Especially in these tough times.

BUT

1. Ensure product is specific to your circumstances – self employed / agency work / contract work etc.

2. What is non-pay period – some policies don’t payout for first 3 months!

3. ONLY go for monthly based policy, not single premium – unless it is at wholesale cost, with no commission attached.

4. Check what you have to provide to claim – sign on/ monthly certificates / doctors notes etc etc

5. Check how long payment lasts.

It is a valuable product on credit cards, as the charge is only based on the amount outstanding, so during good times and if you clear your card, it costs nothing. Valuable on a mortgage, but again do research, don’t just take the mortgage provider’s contract. Search around.

The sale of PPI has changed significantly over the past year or so, as many past products are now being claimed against as mis-sold, so providers are more cautious in ‘stitching up’ the client. As always, look at the small print and take notes, and send written confirmation of your understanding to the provider of any conversation you have had.

But is the matter resolved? This month’s edition of the magazine “Moneywise” has an article entitled: “The 10 financial products to ditch now”. (the front cover and the web version were even more forthright: “10 rip-off financial products.”)

Here is the piece:

PPI, which promises to cover the repayment on a debt if you lose your job or are unable to work due to illness or accident, appears to be a prudent way to protect yourself from huge debts. But, unfortunately, the banks’ hard sell of PPI meant that thousands of people ended up with a totally worthless product. “They were selling PPI to the self-employed,” says Peter Staddon (*see below), “although they would never have been able to claim for unemployment.”

However, don’t let this put you off all plans. “Some policies are good. Look for those sold through brokers as they can arrange cover that suits your needs,” he adds.

Alternatively, consider income protection insurance, which can pay until you retire, and is often more comprehensive.

SAVING: The figures vary but, according to which? PPI could add an additional £2,000 to £3,000 to a £7,500 five-year loan

USELESSNESS RATING: There are better protection products available

* Peter Staddon, by the way, is the head of technical services at the British Insurance Brokers’ Association. His view should therefore be taken seriously.

PPI can provide valuable protection but beware, especially if you are self-employed.

Finally: the same issue of Moneywise confirmed that new customers with Lloyds Banking Group will not be “ripped off by the sale of PPI (their wording, not mine) alongside loans, mortgages and credit cards after the bank announced it would stop pushing the product. Lloyds is the first of the banks to take this step”.

A most welcome step.