What Should Be Done About Payday Loans?

Written by Karen Bryan

paydayloansThere’s so much negative press about payday loans. I’m not a fan of them. However, if the payday loans business is booming, there is clearly a demand for their services. There’s a lot of talk about more regulation of payday loans companies, but the alternative of loan sharks could be worse.

I can see the demand for payday loans increasing. The UK economy is still bumping along the bottom. Real wages are back at 2003 levels and a three year 1% annual cap on working age benefits is about to be introduced, when inflation (RPI) is running at above 3%.

So what do I think could be done about payday loans? I’d like to approach the issue from the angle of reducing the demand for payday loans.

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I suppose it starts with better financial education of kids by their parents and at school. Parents saying “no, you can’t have that because we can’t afford it” to their kids would be a good start. There’s too much emphasis on the stuff you have in our society, e.g. wearing brand name clothes and having the latest gadgets. Don’t worry, you’re not going to give your kids a deprived childhood if they don’t get everything that they want/demand.

If you are spending more money than is coming into your household, there’s no alternative but going into debt to pay for that spending. Paying interest on your debts, especially at the high rates charged by payday loan companies, means that you are having to spend more of your income paying the interest on that debt and have even less money left to pay for living expenses. This means that you are probably going to need to borrow more money to fill that gap.

You have be honest with yourself when deciding what is essential spending. Could you give up some non-essential spending to rein in your expenses to allow you to pay back your debt? Once the debt is repaid, could you start to live within your means and build up an emergency fund to avoid getting into debt in the future? However, I appreciate that there comes a stage where it’s very hard to reduce spending without going into real hardship.

Maybe if a living wage was introduced, currently £8.55 per hour in London and £7.45 in the rest of the country, compared to the £6.19 an hour minimum wage, that could address some of the issues. It could make working more financially attractive by increasing the income of the lowest paid workers.

An increase in threshold over which income tax is payable would also boost the take home pay of lower paid workers. I think that the tax threshold should be the equivalent of working for 40 hours on the minimum wage; that would be almost £13,000. Whereas the actual threshold will be £9,440 in the tax year beginning 6 April 2013.

Increasing the level of benefits might reduce the demand for payday loans too, but is unlikely to be popular with taxpayers who’ll have to foot the bill for the increase. If there was a general perception that those in receipt of benefits were genuinely unable to work, higher rates of benefits to fewer claimants might be more palatable to taxpayers. However, more stringent criteria to receive benefits could be expensive to administer and be thought of as too judgmental and intrusive.

More access to lower cost loans, e.g. through credit unions or peer-to-peer lending, would mean much less to repay in interest on loans. However, many people applying for payday loans might not be considered as creditworthy by other lending institutions.

What do you think are the best ways to reduce demand for payday loans?