By Lynn Malone
Payday loans are constantly under the watchful eye of the media lately and this week is no exception with the news that Archbishop Justin Welby has declared war on Wonga.
What must also be up for public debate and scrutiny however is the increase in the demand for payday loans among young adults between 18 and 34.
Recent statistics by R3, the trade body for the Insolvency Professionals, show the popularity of payday loans has dipped, with just seven per cent of UK adults planning to take out a payday loan in the next six months. But the demand for payday loans is highest amongst young adults, with 17 per cent of 18-34 year olds likely to take out a payday loan in the next six months, compared to just three per cent of those aged 35 and over.
R3 president Liz Bingham says that negative publicity about the risks of payday loans may be starting to affect their popularity but they were still a “significant financial crutch for younger age groups.”
“It is very concerning that the age group with the biggest demand for payday loans is also the group where there is the biggest concern about the impact of those loans amongst those that have already taken them out. In this context, the demand for payday loans among young adults is worryingly high.” she said.
“Rent and study costs, along with a lacklustre graduate jobs market are the catalysts that force young adults to turn to short-term credit to fund day-to-day expenditure.” she added.
Out of the 94 UK adults R3 surveyed, who had taken out a payday loan, 51 said they had prioritised repaying their loan over buying food in the last six months.
Three young Scots spoke candidly to Newsnet Scotland, revealing the truth behind the growing trend for payday loans in young adults.
William Morris is 26 and lives in Glasgow. The kitchen porter, who works for a well known luxury hotel chains earns a low wage and is often penniless before payday comes around has gone without food to pay off his loans. He has had to employ the services of Ramsdens Pawnbrokers many times.
With branches nationwide, Ramsdens declare they are “…here to help with all your financial needs.”
He said: “I always struggle to get by to payday. It only takes one misdemeanour and that’s it, I’m knackered financially, skint for the rest of the month.
“I struggle because I’m on a low wage but the price of everything has gone up and wages haven’t. And there aren’t enough hours in the catering industry, I’m casual and have no contract, so I don’t know what I will be getting from one week to the next.”
Are young people more affected by payday loans? Alyn Smith SNP is the MEP is leading the drive to curb the payday loans companies, as evidence that vulnerable people are being left with severe financial difficulties begins to mount up. He understands the plights of young people like Mr Morris.
He said: “It is no surprise that younger people in work are struggling; the ads are clearly designed to appeal to them. The cost of living is rising, and people are under pressure with the UK state aiding and abetting quick fix solutions that are long term disasters.”
There can be an element of shame amongst those who have taken payday loans. One young man, who wanted to remain anonymous, is furious with Wonga for ruining his chances of getting a mortgage. ‘Pat’ (not his real name) who works with a local authority was taken in by Wonga’s advertising campaign last year when they sent e-mails implying that taking a loan with them could “do wonders” for people’s credit rating.
Pat said: “Wonga had an advertising campaign saying it could do wonders for your credit rating but it does the opposite. In the space of a year my credit has gone from a good credit score to a ‘one star bad’ and that’s solely due to Wonga loans.”
He conducted some research and was horrified to find a Wonga loan on his credit file went down as a ‘settled’ debt rather than a paid item. Experts say a settled debt looks like the person has gone into default and then settled. Lenders see it as though borrowers have been in financial hardship so they won’t touch them.
“I took out five or six and paid them all on time. I could have got a loan elsewhere but thought it would build my credit rating because of the way they advertised it.
“I was going to apply for a mortgage but I won’t have a chance of getting on the housing ladder for a long, long time now.” Mr Boyd said angrily.
Wonga had to publicly apologise when they were contacted by a Money Saving Expert, MSE user who received an e-mail from Wonga last year which read: “Repaying your Wonga loan on time does wonders for your credit rating!”
MoneySavingExpert.com money analyst Helen Saxon warns on the consumer website: “Far from benefiting your credit rating, payday loans can actually have the opposite effect.
“Even if they’re fully paid off, their presence on your credit file can cause other lenders to turn you down flat, as it could be a sign you can’t manage your money.”
But Pat got no such apology from Wonga. When he complained that he had been misled they told him: “We pride ourselves in being a responsible lender, and part of being a responsible lender requires us to report accurately and fully to the credit reference bureaus: this means reporting every time an applicant applies for a loan, every time the loan is settled.”
Citizens Advice Scotland [CAS] says around 75 per cent of young people in Scotland are in debt. A spokesperson said: “Our research shows that around three-quarters of young people in Scotland have a personal or unsecured loan. This is a symptom of the fact that young people are less likely to be homeowners with access to secured credit.
“The tax and benefit system also frankly discriminates against young people. They are entitled to lower payments and less support than older adults, whilst their entitlement is often complex and difficult to understand. For example young people under the age of 25 are entitled to 20% lower Jobseeker Allowance (JSA) payments – for no reason other than their age. Facing the same cost of living as everyone else, it’s not surprising that many young people will try to plug the gap by taking out loans.
“We have done some analysis of the people who have payday loan problems, and though anyone can be affected there is no doubt that the 18-35 age group seems particularly vulnerable. A high proportion of our clients are in social housing, and most of them were in employment.”
Not all borrowers are in crisis, Katherine Gilhooley from Glasgow has used payday loans since going to High Street lenders, The Money Shop, just before Christmas, last year.
She said: “My wages are good but I spend a lot, I spend far too much so they don’t last the month. It’s a vicious circle, the interest rates are a fortune and you have to pay it back quickly, but I used them because they’re easy to get. I took £230 and had around £300 to pay back in 30 days.”
The bubbly 24-year-old doesn’t rely on the payday loans for essentials and is candid as she explains that she used them to fund her hobbies and lifestyle, saying, “I spend a lot on holidays, festivals and clothes and I love going out.”
But Ms Gilhooley’s future plans do not include shopping on the High Street for money any longer. Now a debt advisor, she was shocked when she first discovered that payday loans could damage her credit rating, having turned to them after exhausting her bank overdraft.
She said: “I knew the interest was high and that was bad enough but I was willing to pay it, it was another option. I never knew it could affect my credit rating, I mean you don’t ask that when you go in to ask for a payday loan, do you. That was a black mark against me every time I took one out; I’m finished with them now.”
CAS are keen to gather more information in the fight on payday loans and are urging people who have taken out a payday loan to complete their survey.
This is what they had to say:
“Judging by the cases that we see in the CAB service, financial problems remain the biggest single challenge for people across the country. This is because of the double whammy of the recession and the drastic cuts and changes being made to the benefit system. People from all age groups and all backgrounds are struggling, as can be seen in the increase in the number of referrals to food banks.
“CAB offices across the country have had to take on more and more advisers who specialise in financial advice. We can offer help to anyone who needs it. But we do urge people to avoid making their situation worse by taking out high-interest payday loans. They may seem like a solution to your problem today, but they are very often a nightmare for the next few weeks, months or even years.”