Friday, 27 December 2013

Debt crisis gets personal

Debt has become an ever growing problem over recent years, with payday loans in particular driving people deeper into trouble.
Debt has become a reality of modern life. It seems almost from the moment a person leaves school or university they become saddled with debts. Student fees, credit cards and then mortgages - all add up to a lifetime of debt.
The total level of personal debt in Britain is £1.43 trillion, an average of £54,000 per household - up from £29,000 a decade ago. Some £1.27tn of the debt is now owed in mortgages and £158 billion in consumer credit.
People are being driven increasingly in these cash-strapped times to look for loans to tide them over. After the credit cards are maxed out the next place to look is the bank overdraft or loan companies.
Of course, if people were paid more there would be less need to go to the loan companies.
Data from the Office for National Statistics shows that between 1977 and 2008 the wage share fell from 59 per cent of national income to 53 per cent, while the share of profits rose from 25 per cent to 29 per cent.
Payday loans are theoretically supposed to tide the person over until pay or benefits day. The problem comes with the practice.
The Daily Record reported recently on a woman who took out four payday loans of £300 each to pay for her father's funeral.
She thought she would get the money and pay the loans off but they just kept building up. She would take out one loan to repay the other and also got bank charges.
Then when she got paid the companies took the money. "I would be paid at midnight and the money would be gone in an hour or two. It meant I didn't have a penny. I ended up with rent arrears and was threatened with eviction. I couldn't eat and had to beg and borrow to get my two kids anything. We were surviving on 25p noodles," she told the paper.
She then got harassed by debt collectors, being bombarded with constant phone calls, texts and emails. She has now got on top of her debts with the help of the Govern Law Centre.
The payday loan can be OK if it is paid off in the time agreed. If you were to borrow £90 from a typical lender for three days it would cost £8.37, which is likely to be less than the bank charges for an unauthorised overdraft.
So if a £200 loan was taken out over 14 days, it would cost £234.27. If the lender is unable to retrieve that money from the borrower's account on the repayment date, a £20 late payment charge is applied. If the loan is rolled over for another 14 days then £274.17 will be owed. If then it is rolled over for another month, the debt will be £368.77.
If the lender cannot be repaid on the final agreed day, interest is added for up to 60 days at 1 per cent a day, then frozen. In this example, that would add more than £200 to the cost before fees were frozen. After four months the debt would have grown to almost £600.
The rates of 5,853 per cent APR quoted by the lender Wonga and 2,400.8 per cent APR by Money Shop are over a year (APR means annual percentage rate). The lenders point out that these are intended to be short-term loans, so APR is not a good indicator.
Critics claim that the companies do not check out the creditworthiness of the borrowers. The Citizens Advice Bureau has reported that among 2,000 loans taken out with 113 lenders, in nine out of 10 cases the borrower was not asked to provide documents to show they could afford the loan.
Of those who had repayment problems, seven in 10 said they had been put under pressure to extend the loan, while 84 per cent said they had not been offered a freeze on interest rates and charges when they said they were struggling to repay.
The use of Continuous Payment Authorities, whereby the lenders can access borrowers' bank accounts, have also caused problems.
"It is unacceptable that in a modern society, growing numbers of low-income households have little choice but to resort to unscrupulous lenders and to be subject to the abuse of power and increased deprivation to which this can lead," says Church Action on Poverty director Niall Cooper.
"Better regulation of the credit industry is urgently needed to bring down the cost of socially harmful credit and to ensure that lenders behave more responsibly."
A recent survey commissioned by consumer organisation Which? revealed that 400,000 people are using payday loans to pay food and fuel bills and 240,000 people are using the loans to pay off existing debts.
Government it seems is finally acting on payday loans, capping the amount that the companies can charge.
Though as Financial Conduct Authority (FCA) chief Martin Wheatley has warned limiting rates, loan terms or advertising would not necessarily curb lenders' behaviour - and could force consumers to use even less reputable providers.
The FCA has already proposed other changes to payday loans, including limiting roll-overs to a maximum of two and introducing more controls on how continuous payment authorities can be used.
One alternative source of credit is provided by credit unions. Credit unions are mutual loan and savings organisations made up of members drawn from a particular area, such as trade unions, the police or a religious group. So there is a need to be qualified by virtue of being a part of one of these groups.
There are now 400 credit unions in Britain and Northern Ireland, with over one million members. In other countries they are much more popular, with 45 per cent of US citizens and three-quarters of people in Ireland being members of a credit union.
The British government is keen to extend credit unions, looking to double the number of members.
Credit unions are prepared to offer loans of between £50 and £3,000. They offer loans at more reasonable rates - typically 6 per cent rising to 26 per cent APR.
Sometimes loans can be under 6 per cent a year, but the interest is usually around 12.7 per cent APR going up to a maximum 26.8 per cent APR. So if £100 is borrowed over a year, the most that needs to be repaid is around £127.
In order to borrow from a credit union, an individual has to be a member and to have paid in for a period.
There are also savings accounts available. Credit unions do not have shareholders, so all funds go into the running of the organisation and better terms for savers and borrowers.
They are also beginning to expand into other products like current accounts and morgages.
Credit unions certainly represent a better option for those looking to borrow. But maybe if wages went up, with measures like the living wage implemented across the board, there might be less need to borrow in the first place.

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