Tag Archives: Pay Day Loans

Payday Loans: The Scottish Parliament Must Act

Payday Loans: The Scottish Parliament Must Act

First published in Bella Caledonia

Pay day lending is a dangerous business. There are no doubts about it. It preys on the needs of the vulnerable that have been created by failure: the failure of our banking system; the failure of our consumer right laws; the failure of our benefit system; and most importantly our failure to protect the most vulnerable.

It less seduces it’s victims with the honeyed fragrance of easy money, than pedals quick fixes to them with all the subtlety and tact of drug dealers. It targets its victims by identifying their weaknesses. Can’t pay the rent: that’s okay we can help; can’t feed the children: here you go; electricity about to be cut: don’t worry.

The experience of many with pay day loans is one of helplessness and desperation. Helplessness as each month the loan rolls over and you know you are sinking deeper and deeper into a hole. Desperation as you realise the possibility of being able to replace the children’s shoes, clothes and uniforms is growing increasingly remote. The desperation that comes from the realisation that one day it may be your children who will be going to school with inappropriate shoes; jackets; lunches.

It causes depression; fear of answering the phone; avoidance of opening the door. Mail lies unopened. Strangers intrude on your doorstep and violate you and your family’s privacy seeking payment.

And Fergus Ewing, the Minister for Energy, Enterprise and Tourism calls this a “legal, fair and transparent”business.

I don’t blame the Scottish Government for the pay day loan industry. How could I? They don’t have legislative authority over consumer credit laws, they can’t cap the interest rates and they don’t have any control over the key economic levers they need to boost employment and growth in our economy.

I can be angry with them, however, for not going to war with them. I can be angry that they won’t do more to discourage the use of these loans, to promote alternatives such as credit unions and I can be angry that they won’t use the powers they have to send a message that they aren’t welcome here.

Fergus Ewing takes the view this would be “inappropriate”; but for reasons of public health it was not inappropriate to take action to discourage smoking; it was not inappropriate to use our existing powers to restrict the use of alcohol through minimum pricing and it wasn’t inappropriate for the Scottish Government to challenge the authority of the Supreme Court.

Pay day loans are a scourge on our society and have grown up and thrived in the cesspit of financial failure that we have been exposed to in the last few years.

But powers do exist which would allow the Scottish Government to act now.

Debt law is an area that has been devolved to the Scottish Parliament. It is possible for certain debts to be treated differently and for interest rates to be frozen or varied once someone is struggling to pay them. Already such a Scheme exists in the form of the Debt Arrangement Scheme, but although this allows pay day loans to be included and for all interest, fees and charges to be frozen, it takes too long to use and allows payday loan companies to benefit from dragging their feet.

It’s within the legislative authority of the Scottish Government to create a new scheme or amend the existing one to create a more streamlined approach with specific rules for pay day loans. The powers allowing for such a scheme exist in the Debt Arrangement and Attachment (Scotland) Act 2004 s7 and s7a.

This, however, requires political commitment: a commitment borne out of a belief that pay day loans are nothing but fair or transparent and the only thing that would be inappropriate is to do nothing. A commitment that is borne out of an understanding of how closely related these firms and their practices are to the issue of poverty; and a commitment that is driven by a belief that the powers of the Scottish Parliament exist if for no other reason, but to make the lives of Scots better and to protect the most vulnerable.

Taming the Rest

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Mike Dailly in his blog for The Firm has called for a new Debt Arrangement Scheme to deal with payday lenders.  I consider whether such a scheme is feasible and if so how it should differ from the current scheme

The Scottish Government’s Debt Arrangement Scheme (DAS) currently allows pay day loans to be included into Debt Payment Programmes. That’s not a problem.

What is a problem is the fact the number of DAS’s where these types of debts are being included is now sharply on the increase, particularly amongst those under 30.

This highlights the problem that is payday loans: they are rapidly on the increase and can quickly turn temporary financial difficulties into longterm serious financial hardship. They also create a problem in that their laissez faire policy of high risk lending often damages not only the interests of the borrower, but their family who may be unaware of the borrowing and other lenders.

The debts that are rolled over often quickly increase in size and with continuing payment authorities being used to deduct funds directly from bank accounts often force clients to default on other debts.

But if the DAS can already be used are we seeking a problem for the solution?

Well maybe, but payday loans being included into Debt Payment Programmes bring their own problems. One of these is it can take between 2-3 months to get a normal DPP programme set up and approved and in that time payday loans can quickly increase due to the fact interest, charges, fees and penalties are not frozen until the DAS is approved. This can significantly lengthen the time of the programme. Also good practice states all unsecured debts should be included into a programme, even when if it wasn’t for the payday loan, the contractual payments to those other debts could be maintained.

So is there a way it may be possible to cut out the cancer without amputating the leg?

We could have a fast track scheme which could have a capital limit on the amount of debt that could be included, such as £3,000. There could  be a maximum length of time such schemes could run for such as 2 years. It would only be possible for short term pay day loans to be included into such programmes and it could be possible to continue to exclude other debts where the client could maintain the contractual payments.

In such cases, as Mike points out, interest could be set at the judicial rate of interest of 8% to reflect the fact other creditors and debts are not being included in the programme and presumably still getting interest paid.  Also programmes could automatically be approved in principle providing they meet the criteria for entry with lenders then having 3 weeks to submit objections. If the programmes is subsequently revoked as the lenders objection is upheld and it is found to be unfair or unreasonable, the lender would be able to reapply the interest, charges, fees and penalties they could have but for the scheme being approved.

In doing this we would be isolating a problem that often leads to more severe solutions becoming inevitable such as bankruptcy. It woul encourage early and limited intervention, in very much the same way a doctor would try and isolate and cut out a malign tumour before it spreads.

Such a Scheme would be a powerful deterrent to payday lenders in Scotland. It would also act as a powerful bulwark against their practice of rolling over accounts and contain the rot that sometimes begins with them but quickly spreads like gangrene to infect other more responsible lenders.

UPDATE:  Govan Law Centre have now published a discussion paper on the proposals. See here.

“…PAY DAY LOANS ARE VALID FORMS OF CREDIT…”

“…PAY DAY LOANS ARE VALID FORMS OF CREDIT…”

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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?