Payday Loans: Yes or No?

August 19th, 2010

The watchdog Consumer Focus has produced some startling and worrying figures this week about the thorny issue of payday loans. The figures show that the number of people using the payday facilities has risen by 400% since 1996.

The figures have prompted the watchdog to call for more safeguards to protect potentially vulnerable borrowers from interest rates which can soar to an astronomical 2,500% per year.

1.2 million people are now taking out payday loans every year, borrowing a total of £1.2bn.

For many people a payday loan is a quick and efficient way of getting hold of short-term credit. If the money is paid back promptly on the next pay day, this type of lending can be cheaper than paying an unauthorised overdraft or a credit card charge.

The problem is that if the loans are rolled over, debts can quickly escalate.

The payday loan industry makes the valid point that, when managed properly, many people find this type of lending easy to understand and less risky.

There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change. But they find that the short term credit offered by the pay day loans industry does meet their needs.

Payday loans are a valid form of credit however, analysts believe that there needs to be a limit on the number of loans people take out and how many loans they are able to roll over.

Consumer Focus has now joined forces with the Consumer Credit Counselling Service (CCCS) to find out how to help borrowers who fall into problems with the first suggestion being that traditional banks could do more to provide the short term credit people need.

The British Bankers Association (BBA) has been quick to move against this claiming its members are already being as flexible as they can. A spokesman said that banks ‘have to make a risk assessment on every lending proposal they receive and quite frankly it does not do any good to lend money out to people if they can’t afford to repay it’. He has a point.

However, this lack of traditional options means that, for many people, a payday loan is still the only legal option for short term lending, when money is tight and there is nowhere else to turn. Although they are not recommended, payday loans are still preferable to using loan sharks.

Posted in Personal Loans | No Comments »

Complaints about loan scams still increasing

August 23rd, 2011

Concerning news this week has shown that complaints about businesses that demand upfront fees for loans they never arrange have risen yet again, according to the Office of Fair Trading (OFT).

There were 3,167 complaints made to advice service Consumer Direct in the 12 months to the end of June, compared with 2,059 the previous year.

The OFT, independent advisors and this blog have all warned consumers not to pay a fee before receiving a loan. This is not standard practice and is a strong, although not conclusive, sign that you are being ensnared in a scam.

In June the OFT said that it was planning to strengthen regulations to safeguard borrowers. At that time it was estimated that 270,000 people had paid upfront fees to credit brokers in the previous year.

Many of the complaints involved credit applications during which potential borrowers were told to send an upfront fee through a money transfer service. A more suspicious demand is difficult to imagine so consumers are advised to be aware of this tactic.

There has also been an increase in complaints about companies who are not interested in the applicant’s credit history, that ask for payment of fees upfront and then disappear with the money.

Consumers are advised to check out the company carefully before agreeing to anything, including asking for a landline number, a physical address and doing a search about the company online, as well as checking that they have a valid credit licence.

Earlier this year, the OFT said it would close down rogue credit brokers, as well as propose changes to regulations that would give more opportunity to have fees refunded if loans were not made.

It also said it would ask the government to consider changing the law to ban outright the practice of credit brokers demanding upfront fees in exchange for arranging loans.

The OFT runs a register which shows whether a company has a valid licence to offer credit.

The problem with this type of scam is that the victims are often so desperate for money that it blinds them to the screamingly obvious flashing neon signs that read ‘scam’ in ten foot high letters.

In such a situation advice to take calm, rational decisions that take all the relevant factors into account is usually useless. However, if you or anyone you know are considering taking out a loan then that is exactly what you should do. If in doubt, consult a debt charity for assistance.

Posted in Personal Loans | No Comments »

A look at this month’s inflation figures

August 19th, 2011

Despite the weak growth figures and summer holiday season inflation continues apace. In fact, the UK government’s targeted rate of inflation rose in July, following higher prices for clothing and footwear and fees for financial services.

The rate of Consumer Prices Index (CPI) inflation rose to 4.4% from 4.2% in June, according to figures from the Office for National Statistics (ONS). The Retail Prices Index (RPI) measure was unchanged at 5%.

Clothing and footwear prices measured for CPI saw their biggest annual increase since records began in 1997.

Bank of England governor Mervyn King has written another letter to the chancellor to explain why CPI inflation remains well above the 2% target rate. The governor must write a letter every three months if CPI is more than one percentage point above or below the target.

He blamed the continuing high inflation rate on, “the increase in the standard rate of VAT to 20%, and past increases in global energy prices and import prices”. It is worth noting that he also stressed that “the big risks currently facing the UK economy come from the rest of the world”.

The Bank of England said last week that it remained confident that inflation would return to its target level in the next two years.

Chancellor George Osborne replied to Mr King’s letter saying that, “A crisis of confidence in the global economy demands a global response”. He called for credible cuts in countries with big deficits and a “rebalancing of global demand to support growth”.

The ONS said the main contributors to inflation came from financial services, clothing and footwear, furniture, household equipment and housing rent. It said one of the biggest contributions had come from fees for financial services, which rose in July but had fallen in the same month last year.

The main downward pressure on inflation came from food and non-alcoholic drinks.

The big picture is still that rises in energy prices and in particular the VAT hike at the start of the year are still keeping inflation high. At constant tax rates, CPI inflation was 2.8% in July.

July’s inflation figures are particularly important because they are used to determine how much regulated rail fares can increase. Under the government’s new formula, fares will be able to rise by RPI+3%, which means average fares will be able to go up by 8% next year.

In other research, Kantar Worldpanel found that while grocery price inflation had grown 5.2% in the 12 weeks to 7 August, compared with the same period the previous year, grocery sales had only risen by 3.8%.

This shows that shoppers are trying to manage their ‘personal’ inflation by trading down. It’s therefore unsurprising that the discount retailers have pushed further ahead this month. Aldi performed particularly strongly, taking its market share to 3.6% from 3% at the same time last year.

Posted in Personal Loans | No Comments »

Banking giant hit in the profits: Better customer service to follow

July 29th, 2011

The banking giant Santander has set aside 620m euros (£548m) to cover the costs of mis-selling payment protection insurance (PPI) in the UK. The Spanish bank is the latest to outline the one-off amount to cover the cost of compensation for mis-selling the loan insurance.

Lloyds Banking Group set aside £3.2bn to cover the cost of this compensation, followed by Barclays (£1bn), RBS (£850m) and HSBC (£269m).

The move hit Santander’s profits. The UK arm of the bank, which includes the Abbey, Alliance and Leicester and Bradford and Bingley brands, saw pre-tax profits dip 3% to £1.2bn in the six months to June.

The parent company Banco Santander reported a first-half net profit of 3.5 billion euros, down 21%.

PPI is supposed to cover loan repayments if someone becomes ill or loses their job, but it has emerged that many of the policies sold by the banks were mis-sold. This blog has been following the consumer campaign with great interest.

In April, the banking industry lost its High Court challenge to new rules on the sale of PPI. Among other things, the rules require sellers of PPI polices to review all their past sales to see if their customers have a claim for mis-selling, whether or not they have actually complained.

While the legal case was going on the banks put on hold tens of thousands of fresh PPI complaints that came in.

Santander was second, behind Barclays, in the list of most complained-about financial institutions during the second half of 2010. The data, compiled by the City watchdog – the Financial Services Authority, was driven, in part, by PPI complaints.

The Santander chief executive said the bank had taken ‘significant steps’ to improve customer service. Earlier in July, Santander said it had brought its call centres back to the UK from India following complaints.

Unless you happen to be a shareholder in the Santander banking group this is excellent news. Hitting banks in the profits is the best and possibly only way to influence their actions. If their dodgy practices and lack of concern for their own customers starts to cost them money then they will quickly change their ways.

Posted in Personal Loans | No Comments »

« Older Entries