Millions dependent on payday loans. But what if they weren

5th January 2012

Payday loans consist of cash borrowed for up to a month, generally less than £400 and carrying an annual percentage rate (APR) that can top 4,000.  They are heavily advertised on daytime TV, most can be accessed online and there is now a page on comparison site Moneysupermarket. They are often available to people with poor or no credit rating records. There are even payday loans aimed at the unemployed – presumably to tide them over until their next social security payment.

But while the loans attract criticism due to interest rates and other conditions, banning them could create many problems.

The Shelter warning is just the latest attack on the loans during the past month – Christmas and New Year are peak borrowing times as consumers get too deeply into festive season debt. In December Labour peer Lord Mitchell urged the government to regulate payday loans to protect "vulnerable and gullible" people. And the Office of Fair Trading announced it would crack down on "unfair" elements in payday loans such as hidden charges and unclear interest rates. This followed a two year OFT probe into the practice.

Besides high interest rates, and complex charging, some persuade those nearing the end of their loan term to roll it over at substantial cost.

Payday loans have mushroomed – one estimate suggests they have grown tenfold or more since the start of the credit crunch. But they are not the only high cost lenders around.

Pawnbrokers, once so rare that the traditional three balls were the sign of an endangered species, have sprung up on virtually every high street.  Some have even started to compete on price. Besides offering loans in return for goods, many pawnbrokers also provide payday loans and cheque cashing – useful (if often expensive) for anyone with a cheque who does not wish it to pay down debt in their bank account.

And old fashioned door to door lending – a staple of the unbanked for decades – is still very much in business. Investors should take a look at the share price chart of Provident Financial, the biggest in a business where a number of rivals including Cattle's Holdings and London Scottish Bank crashed in the sub-prime crash.

The one year chart is a mirror image of the FTSE All Share – when it rises (on general business optimism) the Provident Financial share price falls – and vice versa. Over 2011, the lender's shares went up some 11% whereas the stock market fell about 5%. Most payday loan companies are controlled from the United States. Provident Financial is a constituent of the ethical FTSE 4 Good index.

But few have looked at the economic and social factors involved if these loans were not available.

No one wants to take out an ultra-expensive loan whether on the doorstep, online from a payday company or from a high street pawnbroker. People do so because they have no choice. Banks do not want to know and high cost loan customers usually either fail credit card tests or have already maxxed their plastic.

With so much of the economy predicated upon consumerism and borrowing, withdrawing or putting stringent rules on these loans could have unforeseen effects – it might be rather like putting a drug addict into cold turkey. Stores might suffer, especially in the more hard pressed areas.

Shelter's preferred solution is to "seek debt advice" from an independent source. Advice can help people before they get into debt trouble with help on budgeting and warnings on what can happen if they follow the daytime TV siren songs.

However, once deep in the borrowing mire, choices are more limited – bankruptcy is one option, as are alternatives to bankruptcy but these tend to assume repayment is impossible. Payday loan and other short term lending companies try to ensure only customers with a high chance of making repayments.

The Shelter/YouGov survey also states that almost seven million people in total are relying on credit in some form to help pay their housing costs, using payday loans, unauthorised overdrafts, other loans or credit cards. The results, Shelter says, reveal the spiral of debt that people are falling into in order to keep a roof over their head. 

But if these loan sources were withdrawn, there could be evictions, repossessions and mass homelessness. Alternatively, landlords and others would have to cut rents, which could lead to their failure to keep up mortgage payments. There is no sign of the government offering more help via social security.

Going back one stage, can people be weaned off excessive shopping when they are assailed on all sides by advertising? Can those needing loans to pay housing expenses cover the costs of their homes in others ways? And how does society stop people getting into debt in the first place against a background of inflationary pressures, no or low salary increases and the fear of joining the jobless?

Many jurisdictions, including several Canadian provinces, have brought in rules to cap interest payments and control undesirable practices such as assuming a rollover unless the consumer makes a positive move to pay off the loan in full several days before it is due.

But the UK government says capping interest rates was "not necessarily the solution" as it could "force some borrowers into the arms of illegal loan sharks". It says consumers should "stop and think" before taking out a loan, a view dismissed as "out of touch" by the opposition. There is some evidence from Canada that too strict a cap forces legal lenders out of the market.

 

More from Mindful Money:

Lies, damned lies and investment statistics

Equities vs. gilts – Challenge the conventional wisdom

Could the wrong social crowd sink your credit rating?

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21 thoughts on “Millions dependent on payday loans. But what if they weren”

  1. Miles Saunders-Priem says:

    I think the real danger is deflation, BOE doesn’t mind if inflation is above 2%, but if it goes below the BOE will promptly counter this. Their agenda it seems is simple: screw savers and anyone holding cash, and force every citizen to either spend their money or invest it in stocks or government bonds. This is bubble-blowing stuff as capital levels go down…

    A thing that puzzles me is high corporate levels of cash; why don’t they spend it if their balance sheets are so apparently strong? If you could answer this conundrum Shawn I will be most grateful.

    1. Anonymous says:

      Hi Miles and welcome to my part of the blogosphere

      As to your question I would simply put it down to a human emotion fear and a state of mind exhibiting uncertainty. In more basic terms it also implies a lack of trust in the banking system, as in they are afraid they may not be able to borrow if they should need too.

      Doesn’t any animal under stress hoard food?

  2. PieterC says:

    Hi Shaun, I’ve sometimes wondered whether the retail price of petrol/diesel is deliberately altered to manipulate the RPI/CPI indices. On July 3rd I paid 131.9p/litre for diesel at a major Tesco store in Sheffield, the lowest for a long time. Prices have since gone up again. I wonder on what date the data submissions for RPI/CPI formulation are taken ??

    1. Anonymous says:

      Hi PieterC

      I can help with that. From this months ONS detailed briefing note.

      “Motor fuels: prices are collected in the middle of the month for the RPI but are averaged across the month for the CPI. This resulted in a larger downward effect on the RPI than the CPI;”

  3. Anonymous says:

    Shaun,

    Currently in France fuel prices have increased roughly 5% as holiday season gets underway – Euro weakness not helping. UK energy prices still major multiplier when it comes to inflation so not looking good later in the year? Will GO need the extra fuel tax in Jan 2013?

    1. Anonymous says:

      Hi Chris

      The way things are going I think he will have to levy the tax as he is likely to be deperate for revenue. But we do not know what the oil price will be then so it is not absolutely certain.

  4. Anonymous says:

    Hi Shaun,

    EUR:GBP should have a large effect on UK inflation, maybe the 18% input costs inflation reflects increased costs of imported materials etc.  Hence the inflation reduction may be due to the present weakness of EUR, not Mervyn King’s actions.

    We just need to observe how the CHF is performing to demonstrate that the UK is not doing well …

  5. Rods says:

    Hi Shaun,

    Another good piece of analysis.

    I’m sure we are going to get another severe bout of food inflation due the bad UK weather and hot weather and a current drought possibly sending grain yields down in the US. Many UK farmers are complaining that they cannot even get on to their fields with a tractor let alone harvest anything!

    With world grain reserves at a low, due to previous bad harvests in Russia, lets hope Russia and the Ukraine have a good year.

    I think the BOE is targeting growth (not very successfully) rather than inflation, which is why there is more QE and bank liquidity schemes to get the banks to lend more. Without growth the only way the Government is going to eliminate the structural deficit is through more austerity (Government spending growing slightly less) and tax rises. This year I see tax the take will rise from 38% of GDP to 39%, so we are already on an onward march towards 45% to eliminate the deficit.

    How much of the commodity inflation is due to bank speculation and market manipulation, who knows, but all of those QE pounds, will need a home and a market where the banks can turn a profit. With the current crop of bank/market manipulation scandals I’ve no confidence in the correlation between market demand and market price. JP Morgan has already priced 2013 futures for US wheat 40% higher than this year, before US harvest totals are known!

    I think the Olympics have hidden much of the UK construction industry weakness, but now that is finished, the industry will take a bit of a hammering. The Government have cut many capital spending projects, so the outlook is not good. Hopefully, when Government money is saved elsewhere some of this will be used for improving infrastructure and reducing the housing shortage, but I won’t be holding my breath. Charging commuters more and spending that on improving the railways is not going to provide any short term growth, where they are robbing Peter to pay Paul. 

    Petrol prices at my local garage went up from £131.9 to £132.9 last Friday.

    UK economic outlook for the next few years: Stagflation.

    1. Anonymous says:

      Hi Rods

      Watching the film Trading Places always made me think of manipulation when I checked “softs” or agricultural futures prices. But it turns out that softs were harshly treated as so many other markets have been manipulated too!

  6. Drf says:

    “The more recent trend for inflation to head nearer to its target was reinforced by today’s numbers.”  I have written it before and I write it again, and I am not alone in my viewpoint:  no central bank can engage in ongoing and continuous debasement in a modern democratic economy without this being supported by fake official inflation data, to conceal the real effect which continuous debasement is having, because it is necessary to deceive the majority of the unaware electorate to get away with it. Fake inflation numbers weighted on the price of items which no one buys regularly and which no one needs to survive, and other means of statistical manipulation, is part of the manner of accomplishing that deception. The fact that the majority of professional economists and financial journalists do not expose this and do not even state it the way it is, is part of this process of collective deceit.

    What this announcement today means in reality is that the way is again cleared for the BoE to shortly announce even more permanent debasement of Sterling in the form of QE “to stimulate the economy”!  But the problem of course is that it does not stimulate the economy, as any fool can see clearly by now, particularly those who continue to lose their jobs, but instead it destroys jobs and the destroys the real wealth creating processes, as it has done ever since WWII. 

    There is only one real way to stimulate any economy, as was shown in Hong Kong many years ago, amongst others; reduce taxes and government interference, and thus encourage the economy to grow naturally and exponentially (Laissez-Faire).  That of course also means cutting public expenditure severely, which is what the politicians do not want to do.  So instead they, and it seems most economists, continue the deceit instead! All the real evidence shows that the present course and approach does not work; when are people going to awake?

    1. Anonymous says:

      If the government of the day and the BoE conspired in the rigging of Liebor the massaging of CPI / RPI numbers would not surprise !

      1. Anonymous says:

        Hi HoppingPot and welcome to my part of the blogosphere.

        The problem for our times seems to be finding out what has not been manipulated and what has. I think before this is over we will discover that the list of the former is considerably longer than the latter….

        In some ways this is an answer to the question posed by the first comment today. Some combination of fear,uncertainty and lack of trust is the answer I think and such behaviour only makes it worse.

  7. JW says:

    Hi Shaun
    Productivity is of course at the heart of our problems. Employment in the public sector increased before the expected cut-backs so it could be ‘decreased’ in a managed way. Overall no changes in headcount with depressed activity, hence falls in productivity. Add in the UK trending the same way as US towards a ‘part-time’ economy and you also get reduced net income to spend as well as the ravishes of inflation.
    And the ITEM club think ‘consumers’ will power the UK out of ‘recession’ in the 2nd half of the year. I must get some of that stuff they are using!
    The Depression will stay in place for 5/10 years and that is if we are lucky. 

    1. Anonymous says:

      Hi JW

      “Employment in the public sector increased before the expected cut-backs so it could be ‘decreased’ in a managed way.” I can hear the episode where Sr Humphrey Appleby described this as a tactic as I type a reply to that.

      I agree that the ITEM club forecasts were somewhat bizarre……

  8. The_forbin_project says:

     Hello Shaun,

    Eventually  by sheer luck the BoE will get one month where the Creative Price Index will be at or near 2%

    and hear them crow !

    Its a constant amazment that  the other media outlets  are just pushing the party line !

    Can they not see the writing on the wall? 

    As pointed out in below posts – real high street inflation is being baked in though levies  for infrastructure ( we were told that the companies would go to the city for finance…. fat chance ) . and external prices …..

     (all utlilities now will be used a milch cows by their owners , many being  abroad and not caring what the the British public think !)

    after the Olympics come sept/oct  we shall see what the real economy is like…. and I’ll bet it won’t be pretty ! but then again perhaps they’ll get Gok to fashion it up!!

    Forbin

  9. DannyBoy says:

    Surely this is expected following a dip in oil prices (in both usd and sterling), and unless the mpc also magically controls global supply and/or demand of such commodities then they’ll be hard pressed to take the credit for temporarily meeting their target.

    But isn’t this the core of the problem: that our inflation level is driven by external forces that the UK has less and less control of. That’s why I believe the output gap theory that you continually point at Shaun, doesn’t work- the UK economy cannot be considered to be a closed system. I would hope the boe amend their models in time, but perhaps it is convenient not to at present, for reasons we can only guess at.

    Anyhow, this is all part of us finding our near-term position in the world, which is as a relatively poorer nation. I would imagine we will continue to see higher than target inflation, and below inflation wage increases for at least several years. Result: Stagnation.

  10. DannyBoy says:

    “Result: Stagflation” that should say.

    1. Anonymous says:

      Hi Danny

      I think that some on the Monetary Policy Committee actually believe that they are in control of events in some way and can grandly twist knobs and pull levers and the economy will recover. Adam Posen continually gives that impression for example.

      In reality it is sometimes much less pleasant than that and a real central banker in my view has to sometimes take very difficult decisions when events are against you like a sterling fall causing inflation. Instead they have behaved like an Ostrich and we have seen no economic progress at all.

  11. Mike says:

    A good article Shaun – thanks.
    Here also from Mish today is another interesting blog.
    http://globaleconomicanalysis.blogspot.co.uk/2012/07/what-role-does-government-play-in-price.html

    1. Anonymous says:

      Hi Mike

      If you want an insight into US inflation then the work of John Williams on Shadowstats will give you plenty to think about!

  12. Noo 2 Economics says:

    Hi Shaun, an interesting blog today. I think there are positives to hold onto today – that “inflation” has been within tolerance for 2 months now, notwithstanding what has happened to real wages.  Bizarrely, fuel prices have remained unchanged here for a few weeks.

    Rods was hoping for a good grain harvest in Russia this year. I read on “Sober Look” a week or so ago that Russia and China have also been hit by droughts although less severe that the US. I agree with Rods and  am confident of inflation increases  later this year as the crop failures translate into higher foodstuff prices (anything that uses corn or wheat) and as most of this is imported we will be hit by the second part of the double whammy being the weakened pound due to the BOE’s ongoing debasement.

    That’s before we even consider the disaster that is the UK summer with crops rotting in the ground.

    Of course, if the UK continues to (paradoxically in my view) hold on to it’s perceived “safe haven” status the pound may well hold up  despite the BOE’s worst efforts!  

    Dannyboy and you have  hit the nail on the head – I think that currently, most of our inflation comes from external sources (commodity imports)  with one main internal source – Government (fuel duty and QE – yes I know the BOE is supposed to be “independent” – ahem). So whilst we have no control over one we could at least attempt some deflationary measures  with the other.   

    As ever an enlightened blog, I admire your warts and all analysis.    

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