Up to four million people planned to take out a payday loan to cover the cost of Christmas. Now, with the festivities finished, they’ll be stuck with the financial hangover.
As bosses squeeze wages and banks refuse to lend, more people are turning to the super high-interest lenders just to get by. The payday loan industry’s total profits have more than doubled from £900 million in 2008 to up to £1.9 billion now.
Wonga, the firm that has done the best out of the crisis, infamously charges 4,214 percent annual interest. But while Wonga has the highest profile it isn’t alone.
From websites like QuickQuid and PaydayUK to high street stores like The Money Shop and Oakam, there are now around 240 payday loan firms altogether.
Many of these firms are trying to look respectable—Wonga sponsors football team Newcastle United and claims to be “the perfect alternative to payday loans”. Oakam even talks about its “mission” to serve “unbanked and under-banked communities”.
Many specifically targeted parents over the holidays. A whistleblower at the Cheque Centre said, “There is a saying among colleagues that where there is a pram there is a loan.” It sent staff out to hand shoppers leaflets with the headline “Need cash for Christmas?”
For those who took up such offers, there’s a big sting in the tail. The Office for Fair Trading says it has had huge numbers of complaints of payday lenders’ “aggressive debt collection practices”, including persistent phone calls and “threats to coerce payment”.
Some lenders have taken money using the bank account details people must provide to get the loan, leaving them “unable to meet essential living expenses”. This is so common it has a nickname—“swiping”.
For example, one woman could not pay back a loan of £650 after her working hours were reduced. She called the lender to work out a payment plan—and they responded by clearing out all the money she had in her account.
Other research showed that one in three people who take out a payday loan feel forced to get another one to repay it.
Britain has no laws against “usury”—there is no limit on the interest rates that legal loan sharks can charge. This has attracted high-interest lenders from across the world, many from the US states where they are being banned.
Wonga has bagged investment from a range of international venture capital firms and hedge funds—including Dawn Capital, chaired by top Tory donor Adrian Beecroft. Wonga’s profits alone tripled to £46 million last year. For the payday vultures, poverty pays.
Frozen wages make workers vulnerable
Many reports have suggested that payday loans are often used to pay household bills. Many people in work don’t earn high enough wages to get them through the month.
The Unite union last year found that 67 percent of workers run out of cash by the third week of the month. And if people are refused credit cards or bank loans, they are left with few alternatives but to turn to the payday lenders.
Wonga is hardly shy about this—its website features a prominent “pay my bills” button. This allows you to enter your utility supplier and account number to send the payment straight to them.
Once someone is relying on payday loans for day to day essentials, they can quickly get trapped in a cycle of debt at the lenders’ sky-high rates.
Payday lenders regularly encourage their customers to “roll over” debts, paying an extra fee to delay the debt up to 12 times. So if you borrowed £400 with QuickQuid and rolled it over five times you would end up owing more than three times as much—£1,286.
Debt charity StepChange says the number of people coming for help after taking out payday loans has jumped by 300 percent since 2010 when the Tories came to office. That’s 7,841 in 2010 to an estimated 2012 total of 30,000.
The Citizens Advice Bureau says that in 2009 one in a hundred people who came to it with debt problems had payday loans. Now the number is one in ten.
Meanwhile the government says it may bring in some kind of cap on the lenders’ interest rates—in 2014.
Get in debt on your doorstep
The rise of online payday lenders doesn’t mean old-style doorstep lenders are going out of business. The largest by far is Provident Financial. It is growing fast, saying it pays its little visits to “around one in 20 households” in Britain.
Many have been paying back small loans for years. An undercover investigation filmed one Provident debt collector saying, “If you allow customers to pay up, they won’t be customers any more. You don’t ever want to let them pay up.”
Sky-high rates for TVs too
Electronics firm Brighthouse will sell you a great telly for only £12 a week. But you’ll be paying it back for three years, handing over £1,980 for a TV worth just £658.
Brighthouse uses shiny shops in poor areas to lure in customers. “Our stores look like a beacon,” explains boss Leo McKee. “Our shop windows are bright and inviting.”
Brighthouse makes much of its money on “extras”—such as fat fees for people who need to defer their payments. It’s opening three new stores every month.
Eight years to eat the world
What if you took a £100 loan at Wonga’s 4,214 percent interest rate and never paid it back? After a year with compound interest, you’d owe £4,200. After two years it’d be £180,000.
Soon after five years your debt to Wonga would be £250 billion—about the national debt of Greece. And by eight years you would owe £43 trillion—the annual GDP of the entire world.