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.