More on KentOnline
More on KentOnline
It seems that each Christmas even the most sensible among us push our spending to the limit in order to indulge over the festive season.
And with interest rates for loans from the major lenders at rock-bottom prices right now, accessing money has perhaps never been easier.
But as we look to push the boat out, there remains a danger it could cause our financial stability to become unbalanced leaving a new year faced with our bank account shipping water and heading for the rocks.
Especially if the decision is to use one of the many payday lenders operating in our town centres and online.
The trick, of course, is to budget wisely during the year, allowing yourself extra spending money for the season of goodwill.
Yet many of us will continue to seek short-term loans over the coming weeks – or in the new year.
And while it is easy to think the excesses of some payday lenders is over, following tighter lending regulations imposed by the government, short-term loans can still come at an eye-watering rate.
“Currently everyone sees the demise of Wonga and everyone celebrates,” explains Catherine Parker, chief executive of the Kent Savers Credit Union.
“Everyone assumes that’s signifying an improvement and an end to the issues in the credit market structure and it isn’t.
“Wonga, by all accounts, went down as a result of the much tougher regulations imposed on it and their competitors, but that isn’t to say there aren’t more creeping in to fill it and the problem is not gone.”
In its heavily-advertised hey-day, Wonga was charging an interest rate on short-term loans of 5,853% per annum before rates were capped by ministers in 2015 and now stand at about 1,500% with a condition that no lender can pay back more than double the original loan amount.
To contrast that, larger loans from regular lenders can be obtained today for around 3% APR.
Followed by a host of other similar lenders, the payday loan became big business.
Wonga, the most high-profile, came in for particular criticism for its use of puppets in its adverts – designed to appeal to a young, and financially inexperienced, customer.
And, indeed, it is the millennials – the 18 to 25-year-olds who are most likely to use such lenders.
Wonga finally went into administration in the summer, but pay-day loans – smaller than those offered by the major banks – remain hugely popular.
It prompted Martin Lewis, the man behind the popular MoneySavingExpert.com website to comment: “Wonga’s payday loans were the crack cocaine of debt – unneeded, unwanted, unhelpful, destructive and addictive.
"How many in dire need of a payday would see such an improvement within a month that they not only not need to borrow again, but they could repay last month's loan plus the huge interest?" - Martin Lewis
"Its behaviour was immoral, from using pretend lawyers to threaten the vulnerable, to pumping its ads out on children’s TV.
“Payday loans are for most a flawed concept.
"How many in dire need of this payday would see such an improvement within a month that they not only not need to borrow again, but they could repay last month’s loan plus the huge interest?
“Of course, we need responsible borrowing too. Yet we have a national problem with financial illiteracy.
"We need financial education to be taught properly in schools. Shockingly some even believed higher APRs were better.”
Yet the payday lender remains compelling for many – a short-term fix for a, hopefully, short-term problem.
But for many that can still be a hugely expensive way of borrowing which can just compound financial debts in the future.
The Kent Credit Union is that rarest of animals – a financial institution which does not seek to make huge profits for shareholders.
Described as a financial co-operative, owned and controlled by its own members and running on a not-for-profit basis, it only offers money to those in the county and encourages savings as much as access to its loans.
Loans which, while open to all, aim to make it easier for those with a poor credit history to borrow responsibly.
Catherine Parker has been chief executive of the organisation, headquartered in Maidstone, for just over six months and admits its low profile means its benefits are often overlooked – swamped by the relentless TV and high street advertising of sky-high interest lenders.
She explains: “The only way we can afford to combine the low interests we do, especially for the borderline credit-worthy borrowers, and to ensure they remain at affordable rates for those individuals, is to run an absolute bare-bones operating cost basis and that means we don’t have the funds to do any decent slick advertising.
“In 10 years, we’ve done really well but it’s all been word of mouth.
"We have clusters in postcodes where people have used our services and recommended us to friends and neighbours, and that’s how we’ve been able to generate that growth.”
It offers loans of around £300 with an APR starting at 4.9%.
Ms Parker adds: “Lloyds and Barclays, for example, don’t offer loans below £1,000 and a large proportion of people we want to serve don’t want to borrow £1,000.
"They really need £300-400 and that demand and need in Kent is reflected nationally for that size of loan.
“It’s where people are working in the gig economy, on zero-hour contracts, they just need to get over a bumpy month, or broken-down washing machine - whatever it is.
“We have to fill and service that gap in the market.”
Remarkably, it actually often loses money on short-term loans.
“The challenge to us,” explains the chief executive officer, “is to try and gain access to a wider breadth of borrower across the portfolio so we can attract a better quality credit on slightly higher incomes and slightly larger loan requests, where the interest generated over the three or four years in which they pay back the loan, we make surplus over and above of the operating cost of administering that loan and that subsidises those smaller loans to the less creditworthy.
“There are big questions over the appropriateness of the checks in place from payday lenders - they are consistently lending to people who cannot afford them in the first place and even if they could afford them, if they’re not repaid in 30 days then the hike in rates is too much.
“It’s exploitative. It’s targeted at people who are the least able to understand and afford the consequences.
“The checks we have are two-fold. There’s a semi-automated sifting process to begin with, which is a lending formula we use initially where income expenditure and credit rating are plugged in, but we’re not a ‘computer says no’ organisation because we do differentiate ourselves from other lenders by taking a person’s situation into account.
“So, we’ll take all types of income into consideration - even if it’s shown to be irregular we can still lend some credence to it.
"Pensions, all types of benefits, we’re better able to understand the implications of Universal Credit, for example, than other lenders, along with irregular or self-employment earnings.
“We’ll always have a conversation over the phone with them and it’s a human process rather than an automated one.”
The issue of Universal Credit may yet have an impact on the market.
While Kent Savers says it has no hard evidence of the new benefits system being rolled out forcing people to take loans, anecdotally it is hearing that is the case.
“Hearsay from the agencies we work with suggests there is a problem,” explains the CEO.
“We have branches we operate through Connecting Canterbury [an organisation set up to help provide support for those in need] set up in churches and they are open and talk to people about the credit union alongside the foodbank colleagues and they all consistently show Universal Credit districts have an upturn in people’s cash-flow consequences.
“People don’t properly understand what Universal Credit comprises and replaces.
“Before, things like housing benefit and employment support could be seen line by line on bank statements.
"Now the paperwork, the explanation, is not clear. We go back to people and ask them and they’re not clear themselves.”
And while the era of austerity may well be coming to an end, according to the chancellor at least, it cannot come soon enough for many.
“We have seen in the last 18 months a distinctive increase from what we would normally expect in terms of bad debt,” says Catherine Parker.
“I think that’s absolutely to do with austerity, juggling various part-time jobs, and the challenges of handling household budgets on that basis.
“Plus, the culture of higher indebtedness.
“The visibility of these payday lenders and the likes of rent-to-buy retailers - that’s the competition we’re trying to address.
"Even unauthorised overdrafts - the stealth of which big banks sneak in you’re paying 80% APR.”
So, think carefully over the coming weeks as to just how you will afford Christmas this year and try not to let the season of goodwill become a nightmare in the new year.
