Britons in the red - personal debts and expensive loans
Debt advice services face cuts as MPs debate better regulation of lenders who target the desperate. But should we do more to help ourselves?
Most employees get paid at the end of the month, but research has found that one in ten of us get into difficulties with money on the 20th and just can't wait for the paycheque.
Without ready money, we borrow to tide us over. But since the start of the 2008 recession, ordinary retail banks have been less willing to lend money, and this has created a business opportunity for companies offering so-called 'payday loans' to plug a short-term income gap.
Problem solved? Only in the very short term, because the interest rate can start as high as 600 per cent and then escalate to 2,500 per cent or even more.
Anxiety and desperation can grow as fast as the loan, and this high-cost legal borrowing is often followed by visits to illegal loan sharks.
Charities and free credit advice helplines offer a glimmer of hope. But yesterday it was revealed that the Citizens Advice Bureau - which offers free counselling and help to people who get into financial trouble - is facing cuts to nearly half its budget, in spite of growing demand for its services.
'Many households will be pushed closer to the edge this year,' said the Consumer Credit Counselling Service. 'I fear that more people who may be just about managing to make ends meet now, will find themselves unable to keep up with their credit commitments.'
The situation has MPs worried. The government says it will crack down on unreasonable interest rates on credit and store cards, and yesterday the House of Commons debated a proposal to cap the amount that can be charged in interest by payday and home credit lenders. It is their door-to-door visits to collect repayments that cause some families such dread.
Taking positive action early offers one solution for people who get into debt. The CAB, however, advises against using companies who charge to sort out people's finances - often by pestering them with phone calls offering help.
The Insolvency Service warns: 'Prevention is much better than cure as far as personal finances are concerned. Review your personal finances frequently and make sure you are not taking on debt that you cannot afford to repay.'
Is this enough? One group of politicians would like to start even earlier – at school. This week a cross-party group of MPs said financial education should be compulsory.
'It's a national disgrace,' said financial journalist Martin Lewis. 'In the last 20 years since student loans launched, we've educated our youth into debt but never about debt.'
- 'I have no sympathy for those who get into debt'. Discuss.
- Should schools educate pupils in 'financial literacy'?
- Design a poster for the Citizens Advice Bureau advising people not to get into too much debt.
- A payday lender might charge 25 per cent interest on a one-month loan. But if the loan carries over for another month, a further 25 per cent interest might be charged on the original loan as well as on whatever interest had been added so far. If you borrowed £100, how much would you owe after 1 month? What about 6 months? Or a year?
Some People Say...
“We should re-open the debtors' prisons.”
What do you think?
Q & A
- Who uses these lenders? And why?
- Between 5 and 7 million people in the UK don't have access to mainstream credit because of a bad credit history. Many turn to short-term lenders.
- It's big business then.
- Yes and some companies are doing very well. Provident Financial, Britain's biggest doorstep lender, made £125m profit in 2009.
- Surely they are preying on vulnerable people?
- Campaigners say so and want better consumer protection. But Peter Crook, chief executive of Provident Financial, says it's a fair price for the risk and no one else will lend to the poor.A Yes. Loan sharks are criminals who use violence or intimidation. The problem is that high-interest loans sometimes drive people towards black market finance.