Payday Lenders Should Be Freaked Out Right About Now
There is no doubt that debt is a huge problem in this country. Many articles are written and we have heard countless heartbreaking stories about how debt has ruined people’s lives.
While it is helpful to reflect on what got us here in the first place, what ’s even more important is how we can tackle the situation now and prevent it from getting worse.
According to the Money Advice Service, 16 million people have less than £100 in savings. Let that sink in for a second. This means that 40% of the working-age population has no safety net, should unexpected expenses arise.
Lee Appleyard, from The Money Advice Service, says that this is a worrisome finding. “When four in ten UK working-age adults have less than £100 in a savings account, it’s inevitable that people need to borrow money to deal with everyday emergencies. Our research shows that 23% of people either revolve their credit card or use high-cost short-term credit.”
Their credit options range from taking out a credit card to dipping into overdrafts. However, if they have got an impaired credit file or a low credit score, their only choice would likely be high-cost credit payday loans.
Let us look at the high-cost credit industry, which is at present, problematic, as it can fuel the cycle of debt while people struggle to make unaffordable repayments. These people are not financially sound to begin with, so the extra funds they need may mean more pressure on their already-strained financial situation.
A year-long joint study, based on an analysis of ~400,000 payday loan applications, found that, on an average, the amount of loan requested was only 6.8 days of an individual’s wage. The data shows that if we encourage an average saving of only a week’s worth of wages, we can eliminate the need for payday loans.
Peter Kondacs at FairQuid, the Financial Wellbeing platform behind the study, said, “One of the most interesting findings is that on average, an applicant, at the time of his application, had been stable with his employer for 46 months. We believe there is a way to leverage this relationship to empower people to become more fit, financially.”
Occasionally, there has been some form of hesitation from employers to offer their support in matters of personal finance.
Sian Williams, the Director of Policy & Innovation at Toynbee Hall, a charity focusing on working towards a future without poverty, opines that “Many employers were reluctant to partner with or refer to affordable lenders because they did not want to “encourage borrowing”, even though most people needed to borrow at some point. Surely, it would be better to help people find fair credit than leave them to the loan sharks.”
There is also a common misconception that access to credit is only necessary for low-income earners. Research shows that 23% of the working-age adults, on a household income of less than £13,500, have more than £1,000 in savings and 40% save every/most months. This means that debt and lack of savings is a negative behaviour that can affect anyone, regardless of their earning.
Credit Unions are an often-overlooked financial provider, but with their not-for-profit community structure, they are the real alternative ethical providers.
Julia Daniel at North London Credit Union adds, “credit unions are owned by their members, which is a completely different relationship than with your usual high-street or online lender. The members are part of our community, where we encourage savings and offer fair access to credit and savings accounts.”
So, to avoid debt, we must change behaviour and encourage people, not necessarily to save more, but to save regularly. Building a small rainy-day fund can prevent dependency on short-term credit.
Sticking to a budget, spending strategically, and wisely planning your financials can help save money for spending on important things, doing away with the need to take out high-cost credit.
References:
https://www.moneyadviceservice.org.uk/en
http://www.toynbeehall.org.uk/
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