Many of thousands of students turn to payday lenders. Maintenance loans and grants just don’t cut it.

Unite Students, a student service, took a survey to put a number on the many students that have turned to payday lenders in times of need. It was reported that 26 400 undergraduate students and 5 400 postgraduate students basically relied on payday loans to get by. In total, they could be paying up to 1500% in interest rates.

When asked to comment the payday lenders replied that students who turn to payday lenders for cash are “capable of making informed choices.”

Jenny Shaw, head of student services for Unite Students, makes it clear that the concern is for students who are turning to payday lenders in desperation. These students are taking out loans that they can’t possibly pay back. There is a great gap between the grants and maintenance that students can apply for and the money that they are actually given. It is no small wonder that students turn to payday lenders. A payday short term loan is easy access to the funds that are sorely needed.

Why do students turn to payday lenders?

Unfortunately we cannot dump any of the blame on the shoulders of the payday industry this time. In fact it would not be surprising that the payday lenders give out loans to students with regret and pity, wishing they didn’t have to. What is the problem? What makes students turn to payday lenders? Ed Milliband does not seem to think that student loans and grants need any kind of reformation. So students and their families sit in a tight squeeze while they sweat out those university years.

In London students can borrow 7 751 pounds per year for rent, food, and any other expenses like travel or entertainment. On top of that another 9000 pounds need to be coughed up for tuition fees, because that is basically how much it costs to teach a student these days. Now it doesn’t matter how you look at it, it’s just not enough and so the assumption is that the bank of Mum and Dad will step in and pay the rest. What if Mum and Dad and down at the payday shop as well? According to recent study, to live and study with basic needs covered, another 5000 pounds will need to be found. For those who make a medium sized income as well as those who make practically nothing at all, it is impossible to support the student in the family. So students turn to payday lenders.

Who is getting the blame for students taking out payday loans?

As usual the payday lenders are taking the wrap. Audrey Jordan, a student in London got herself into 6000 pound worth of debt with payday lenders. Here is what she says:

“I would say to students thinking about using a payday loan provider – take my advice: do anything to avoid it.”

At the same time the National Union of Students is speaking out against that the loans and grants are insufficient.

A spokesman from the Consumer Finance Association (CFA) stated that responsible payday lenders would not give a loan out to a student if they did not have a job or any other form of disposable income.

Across the pond: We take a look at payday loans for low-income users

 

The payday loans dilemma seems to be consistent the world over. In any country, the companies that fork out a quick loan to just about anybody are currently under siege. These loads have different names all over the globe. From title loan, to short-term credit loan, to an emergency loan, but the most common description for these loans is the ‘payday’ loan, and according to different authorities, payday loans for low-income users. I think we all know what the payday loan was designed for, and that it was meant to live up to its name. A loan to tide you over until you get to your next pay check. A quick loan that obviously comes with a hefty interest rate, fees, and charges. A payday loan is a loan that was never meant to be paid off over months, and that is where the problem started. People began to see payday loans as credit for low-income users and these users have difficulty repaying a loan, let alone the electricity, rent, or supper.

Are payday loans for low-income users doing more bad than good?

While addressing the population of Birmingham, Alabama, President Barack Obama said:

“The idea is pretty common sense: If you lend out money, you have to first make sure that the borrower can afford to pay it back. But if you’re making that profit by trapping hard-working Americans into a vicious cycle of debt, you’ve got to find a new business model.”

Our cousins on the other side of the Atlantic are not much different than us. Here in the UK we have seen the FCA (Financial Conduct Authority) take the reigns of the short-term payday industry, passing across the board regulations that will ultimately be beneficial for those payday companies that have been approved. Competition is actually being generated. In America, Federal Government has begun to compile a set of regulations that will apply country-wide in comparison to each state for itself. At the center of the CFPB (Consumer Financial Protection Bureau) is a set of regulations requiring payday lenders to verify that the customer have an income that allows repayment of the loan. This stops payday loans for low-income users to spiral out of control, landing in the debt-trap that the president speaks out against.

Do payday loans affect low-income Americans? Or can the economy take some of the wrap?

According to by the Washington-based think tank, Urban Institute, around 2.5 million households took out a payday loan in 2013. Since that time, the number of loans taken out by Americans has risen by 19 percent, even though unemployment has fallen and the economy is busy bouncing back. On average a single borrower brings in less than 23 000 dollars, which is well below the poverty line. 80 percent of loans are rolled over of renewed incurring more fees. Over 12 months, on average more than half of the total borrowers had more than 10 loans and had rolled over existing loans or borrowed again.

Are payday loans designed for those living in poverty?

The answer is no, and the fact that the poor have no choice than to approach payday lenders for financial relief says a lot about the economy that has made such a brilliant come back. Don’t mistake a payday lender’s store for the welfare queue.

Payday loans and temporary debt relief

Payday loans, or short term loans, in the UK are usually loans up to £500 to be repaid over a short term, or until the borrower’s “payday”.

As there are not restrictions on interest rates here, the standard annual percentage rate (APR) for payday loans can be high, at 1,000% APR plus.   It is common that payday loan costs up to £25 for every £100 on loan per month.  So it would be well to shop around.  Start with internet research first before making any commitments.  Then commit to thorough research of the high-street credit companies, preferably well recognised, reputable corporates with industry memberships.  Also check the APR as all lenders are compelled by the government to publish a “Representative APR.”

Be very aware that the cash provided will be at a high cost, so use the cash wisely and for emergency situations only.

Other sources of borrowings

If a person really needs short term credit alternatives to short term loans from high street money lenders including banks are buying and selling gold, pawn-broking and exchanging foreign currency (left over from holidays).  All these assets have value.

The Payday loan industry in the United Kingdom has grown rapidly since the recession of 2008 and in these austerity times, many people are forced to use this key facility to help them tied over to the next month.

The average loan size is circa £280 and two-thirds of borrowers have annual incomes below £25,000.   Over the past few years, the payday loan industry generated around £240m plus in revenue per annum; it accounted for around 20 percent of the total lending.

The largest payday lender in the United Kingdom is Dollar Financial Group, founded over 30 years ago, which provided around a quarter of all payday loans in 2009.  In 2011, Dollar Financial acquired the largest British internet payday lender, PayDay UK.  The company has a major high street presence.

Payday Loan Companies

Be sure to check if the organisation that is lending you cash has solid customer service policies in place.  Check too if it is a member of professional bodies such as the Consumer Finance Association.

Membership of such authoritative industry bodies means the company in question implements a policy of responsible lending.    The cautious policy reference means the company supports responsible borrowing so that people don’t over extend themselves.    There is no point in over-borrowing and being unable to repay the loan with its high, maybe compound interest rate.

Also confirm that the company you approach is authorised and regulated by the Financial Conduct Authority regarding credit related activities.

Through its shops and websites, Dollar Financial UK provides financial products and services including short-term loans, cheque cashing, gold buying, jewellery and pawn-broking services as well as exchanging foreign currency and money transfers.

Payday loans have acquired a bad reputation because some lenders are not to be trusted.   There are some borrowers who make use of payday loans consistently and then complain about the consequences.  So do your homework and avoid the dubious loan sharks.

Payday loans – some key points

We would raise the following for your consideration if really needing a payday loan:

  1. Reconsider if you have a family member or close friend who could support your emergency situation.
  2. Consider if you could split your payment over more than one month.  Ask the party in question.   Asking costs nothing.
  3. If the only alternative is to approach a lender other than your bank and maybe extending your mortgage, review the exact loan terms from more than one company, access to their customer service on a 24/7 basis and also their corporate or company formal status. Ask if there are any additional costs, for example, being charged for phone calls.
  4. Ask questions if the payday loan company has been in business for a long time and is considerable in size, and therefore not a lone-shark one-man band.
  5. If an online lender, check if the company is both registered and licensed.
  6. Given that you are perhaps forced to seek the best payday loans, it means that you are under debt stress which can lead to mistakes.
  7. Using a payday loan services means you are in a rare emergency. If you utilise payday loan lenders more than say once in several years, then know something is wrong in your financial planning.
  8. Be objective in making your decision. Once you have done your research, take time to make your choice wisely.  If you don’t pay at month end, you could be in line for the compound interest spiral.

Although people moan about credit card interest rates at averaging around 19 annual percentage rates, UK payday loans are far more expensive.

But then, quick and fast payday loans are only meant to tide you over until your next payday – a month at most.