During Debt Awareness Week people are turning to payday lenders to stay afloat
“One client I saw, a benefit claimant, had loan debts of £7,000. It wasn't payday loans he was taking out, but benefit day loans. The client was at his wits' end, doing anything to keep a roof above his head, but lenders kept on lending while his options ran out.”
These words, from a Citizens Advice Bureau manager in the North West of England I spoke to, tell rather a typical picture of many people's finances in the UK today. But while the national government continue to reap self-praise about the “recovery” of the economy, we should be asking who pays the price for debt-fulled growth?
January can be the longest month of the year for many people. With some being paid before Christmas trying to get through the whole month can be a real slog. The temptation to take on more debt, to supplement wages, becomes all the harder to resist.
The problem we have today is the clearance of mainstream banks from many less affluent areas. Research carried out by the School of Geography in the University of Nottingham found that some 7,500 bank and building society branches have been lost in the period covering 1989 – 2012. Inner city areas have lost banks at a rate of 3.5 times faster than more affluent suburbs and small towns.
The inability of mainstream finance to incorporate lower income families has meant that the majority of credit products in the market today are from non-traditional lenders such as payday lenders and pawnbrokers. These products have essentially been created to lock people into debts and are widely condemned for their sky-high fees.
We are not only witnessing a personal debt time bomb, but a debt crisis that is disproportionately impacting upon forgotten people, in poorer neighbourhoods, who have just been allowed to fall out of the mainstream.
Many of us find that there is far too much month at the end of our money, and it is only because larger banking institutions on the high street fail to recognise their duty to the wider public that more and more people find themselves trapped by the likes of Wonga, QuickQuid or The Money Shop.
While it is positive that the IMF has raised its economic growth forecast for the UK, will we hear so much about the financial crises that occur on a daily basis? Will we hear about the 15m Britons who, according to charity StepChange, show signs of having problem debt?
Debt Awareness Week is an absolutely vital time when debt advice charities can highlight the importance of their work and advocate on behalf of early intervention for debt problems before they spiral out of hand. However politicians and policy makers on all sides of the political divide must remember that there is a changing face of debt today which has largely been scooped up by predatory payday lenders.
It's not as easy as telling people to pay down their credit cards anymore. Banks have left a void that has been filled by high cost credit sellers, disincentivised to carry out the proper credit checks on its customers that would normally indicate whether an expensive loan is the most appropriate course of action for them.
What we need instead is growth of credit unions, co-operative and member-owned institutions that offer credit at very competitive rates of interest (many credit unions charge around £8 interest on a 30-day loan of £400 while Wonga charges £125.48 interest and fees).
Signposting responsible credit and making sure wages meet good living standards is the surest way of making problem debt history.