Payday loans still suck
The payday loans industry is working hard to secure better press coverage, but the loans still suck.
I’ve just a read a very odd interview on the Guardian website. It’s with a man called Errol Damelin who is the boss of Wonga.com, a payday loans company. It’s not surprising that Damelin has attempted to defend his industry in the interview, but some of his arguments are weak to say the least.
If you don’t know what payday loans are, they’re short-term cash loans which are supposed to be repaid quickly – often on your next payday.
So when I saw the Guardian interview, I was curious to see how Damelin would defend his company. Some of his responses astonished me.
Let’s look at a few:
“Yes, we’re in a space that is controversial.... but it is an important social service. To have social mobility you have to have credit available to people where it’s required and where it’s appropriate.”
That’s quite an answer. I’ve never heard anyone suggest that payday loans can boost social mobility before!
“They are picking on the wrong people. We are the good guys.”
So charging annual interest at 360% is “good?”*
“There’s a younger generation of people who tweet. They Facebook. They’ve just taken the world into their own hands in a different kind of way. And part of that is deciding on your own how to control your own financial future. We’re part of that generation and people who don’t understand that much about us.”
When it comes to money, I suspect that today’s youngsters aren’t that different from the last couple of generations. Most young people want to have fun, go out a lot, have sex, and maybe travel. The only problem is, they normally don’t have much money and they can get into debt as a result.
Many youngsters manage their financial affairs in a reasonably successful manner and are able to pay off their debts without incurring horrendous pain. Others get into a serious mess. That’s how it was 20 years ago, and I’m pretty sure that’s how it’ll be in ten years’ time. The existence of Facebook and Twitter doesn’t change any of this. Borrowing at 360% isn’t going to help anyone manage their finances prudently.
I was also interested to read Damelin’s comments on who are the typical users of his service. He cited two examples:
- Someone who is hit by a surprise bill such as a boiler breakdown
- Someone who needs to pay for a ‘treat’ such as a ticket to Glastonbury or a Champions League football match.
The Glastonbury example is ridiculous. If you can’t afford to Glastonbury, don’t go.
And if you’re determined to ignore my advice and borrow to pay for your ticket, then at least take the time to plan ahead. The timing of the festival isn’t a secret, so you can take the time to organise a personal loan at 12% or borrow via a 0% credit card if you’re able to get one.
I admit that Damelin has a slightly stronger argument when he talks about a ‘surprise bill’ such as a boiler breakdown. In that instance, you may well need the money immediately, and the fact that a payday loan can reach your bank account in just 15 minutes is attractive. The problem is the cost. If you borrowed £400 from Wonga.com and repaid your loan after a month, you’d pay £133.48 in interest and fees!
The best way to avoid taking a payday loan for an emergency is to build up a ‘savings cushion.’ This can be used when things go wrong.
Even if you’re not able to build up some savings for emergencies, you might be able to persuade your bank to lend you money via an authorised overdraft. Another option could be use to your credit card to pay for the emergency and then pay off the ensuing card debt within the next six weeks or so. If you're really desperate, maybe see if you can borrow from your friends or family.
If you feel you have no option but to take out a payday loan to pay for an emergency, make sure you pay off the loan as soon as possible and learn the lesson. If you have no savings, you’re very vulnerable and you could end up paying massive interest rates in an emergency.
In fairness, payday loans providers put forward two further arguments in defence of their industry. Firstly, they argue that a payday loan can work out cheaper than an unauthorised overdraft and that’s true. Fees for unauthorised overdrafts can be extremely high.
Secondly, taking out a payday loan is better than borrowing from an unregulated, illegal loan shark. If the government introduced a cap on payday loan interest rates, illegal sharks would probably benefit. These illegal lenders often use violence and intimidation to ensure their loans are repaid.
Both these arguments have some truth in them, but they don’t alter the basic truth that payday loans are very expensive and can be avoided if you budget prudently and plan ahead. They’re not a force for good.
Damelin is right, many under-30s spend a lot of time on Facebook and Twitter. But just because they’re web-savvy doesn’t mean they can’t be finance-savvy too. Taking on highly expensive debt is almost certainly the wrong thing to do.
*The official representative APR for Wonga.com loans is 4214%. Damelin feels it’s not a fair calculation so I’ve used his preferred figure of 360% annual interest. Just to be nice.