How to stop toxic payday loans causing yet more damage

FIRST PUBLISHED: 2013

FULLY UPDATED: 2017

Britain’s financial watchdog has finally cracked down on payday loans after years of complaints, bad practice and heart-breaking stories. But is it a case of too little, too late?

Iona Bain

The payday loan has become the product that we all love to hate. Yet a quick google search for payday loans will throw up millions of results, and we probably all know a friend of a friend who has borrowed a quick slab of cash to tide them over.

For those two reasons, we are starting to see the inevitable backlash to the backlash. With so many companies offering this service, and so many people eager to use it, surely the payday loan market serves a useful purpose?

This is a logical argument when you consider how difficult it would be to borrow small chunks of money from any other institution in less than an hour. Payday loan companies have thrived because banks in particular cannot realistically offer a comparable deal.

But credit unions certainly can. For instance, the Glasgow Credit Union runs a worthwhile service which gives quick loans to approved candidates if they have been diligently saving with the credit union over a reasonable period. Yet how many young people know this about this solution, let alone take advantage of it?

Students from James Watt College in Kilwinning, Scotland, have also done their bit to spread the word. The JWC Money project is ardently in favour of credit unions as a means of keeping a young person’s financial situation on an even keel. They are wholly against toxic and unnecessary payday loan companies, drawing on their friends’ devastating experiences at the hands of this industry. They are determined to make young people aware that there is an alternative that really does have their best interests at heart. Here is a bit more about their fine work;

“We teamed up with our local Credit Union, contacted local MPs and secured the support of Young Scot to assist us in launching our own college information and access point. In addition, we used social media (Twitter and Facebook) to help publicise our project. We created our own website to provide information for potential savers and to highlight the work being carried out as the project progressed. Our launch took place on the 1st February 2013 and was a tremendous success. We were fortunate enough to have three MPs in attendance and two of them spoke passionately in support of our efforts.”

As I pointed out on LBC radio not that long ago, banks could do worse than copy a model which allows people to borrow, so long as they have saved into a pot of money and can demonstrate they will pay it back. This also allows us to kill two birds with one stone when addressing the lethargic saving pattern among many young people.

There have been numerous surveys that dispel the myth that young people are incapable of saving for tomorrow. However, our low interest climate, the seemingly futile nature of saving for gigantic house deposits and all the other financial pressures coming to bear on young shoulders mean we need to create new incentives to save money.

But another key reason why so many vulnerable citizens, including young people, draw on payday loans is because they cannot see another way to get through. Instead of shrugging our shoulders and accepting this as a fact of life, we must once again look at the “quick-fix” financial attitudes that permeate our society, and whether they create more harm than good.

Financial education is (thankfully) now compulsory in English schools which teach the national curriculum. But not  money lessons will only appear where enlightened teachers are endorsing and promoting the idea. It is already too late for my generation; it really was pot luck as to whether we would gain any financial wisdom from our elders when we were growing up.

Meanwhile, payday lenders know every trick in the book when trying to lure young people into taking out unsuitable loans. Technically, both the OFT and the FCA will frown upon payday loan companies that appear to promise quick cash with no credit checks. They will also not take lightly to firms exploiting financially vulnerable people, such as the unemployed or students.

But I found one payday loan company that is ticking both boxes! Step forward “Unemployed Student Loans”. http://www.unemployedstudentloans.co.uk/

Thankfully, this website has since been removed since I flagged it up to the Office of Fair Trading and the Financial Conduct Authority.

But it was difficult to judge whether this outfit was based abroad. That is critical in determining whether payday loan brokers are outright frauds that could easily take young people’s money, or whether they simply fall outside the UK regulator’s remit.

It indicates how uncontrollable internet-based companies can be, and why we should have set much harsher conditions for payday loan companies before the problem got out of hand. Good luck to the FCA in trying to tone down the pernicious elements of this phenomenon – it will need all the help it can get.

Here are five ways that you can fight the good fight:

1) Find out what your local credit union does, and see if it can provide you with some information (leaflets etc) to distribute to friends and family.

2) Ask your teacher, supervisor or the staff at your college whether you could do a presentation on this subject – or perhaps you could discuss the possibility of getting a local credit union to pay a visit

3) Apply to the Money 4 Life challenge with your friends – for more information, visit https://www.moneyforlifechallenge.org.uk/

4) Write to your local council and request for payday loan companies to be blocked from public libraries in your area, if this hasn’t already happened. Local authorities in Manchester, Birmingham and Dundee have already done this.

5) Report any dodgy-looking companies that you come across to the Office of Fair Trading’s action helpline (see my previous post for more details).

6) Compare and contrast various banks in terms of their overdrafts. There are a few that will permit you to borrow money interest-free up to a certain level. Check how long the 0% interest buffer lasts, and also whether a monthly fee for using the account applies. I will be coming back to this subject in more detail soon.