The BBC has recently reported that the number of people now taking out payday loans has quadrupled since 1996. Consumer Focus, the organisation which aims to champion consumer rights has suggested up to 1.2 million people are now taking out payday loans every year, worth up to £1.2billion.
Suggestions, however, from Consumer Focus that payday loans are a valid form of credit is ridiculous, considering most of the firms that offer these high interest loans, do so with a model which is based on “flipping” borrowers up to eight times. That is their business model is not based on people repaying the loans with exorbitant levels of interest quickly, but rather borrowing at the end of the loan agreement, to repay the loan and, therefore, borrow more.
Even the article by the BBC admits once the loans are not repaid, the debts can quickly escalate.
The statement that these loans are better than taking out a loan from a loan shark is ridiculous. The irony in this and, what is little know, is often loan sharks can lend at a lower level of APR (interest rate) to those being offered by doorstep lenders and payday loan companies.
Often when loan sharks are caught and convicted, they are convicted on the technical grounds that they don’t have a consumer credit licence. But for that omission, many of these lenders would arguably be lending on more competitive grounds than many “legitimate lenders”.
Obviously, with legal lenders there may not be the threat of violence, but not always. As someone who has worked with debtors for years, it is not unusual to hear of client’s facing cloaked threats of violence or harassment from lenders with consumer credit licences.
To argue that payday loans can be reformed to be acceptable is a ridiculous suggestion and completely misunderstands the exploitative nature of these lenders, which exploit the same vulnerabilities that other illegal lenders do.
There is only one solution and that is to make available short term affordable and accessible loans to those on low income and also extend the availability of the social fund to assist people with necessities.
What do you think? Are pay day loans a valid form of credit?