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Managing my money for young adults
Managing my money for young adults

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10 Danger! Payday lenders

In this video Hugh Stickland, Chief Economist of Citizens Advice, talks about trends in enquiries from people in difficulty with payday loans and asks whether the new rules of the Financial Conduct Authority (FCA) are helping consumers.

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Payday lenders are an alternative source of credit that have emerged in recent years. Lately, their business practices have come under fire and attracted great interest in the media and with regulators.

They are criticised for charging extortionate rates of interest on short-term loans and for dubious lending practices.

Tighter regulations on the way the payday lenders do business were introduced in 2015. This includes a 0.8% per day cap on interest charged. Additionally, no one now has to pay back more than twice the sum borrowed (the aggregate interest charge is capped at 100% of the loan).

The Archbishop of Canterbury, Justin Welby, has gone on record as wanting to help credit unions take on payday lenders and force them out of business. There are over 350 credit unions in the UK who collectively lend around £700 million – these are small mutual organisations often linked to places of work or particular localities that lend money from pooled savings.

So should payday lenders be forced out of business? Should their business be redirected to the credit unions?

While credit unions represent a lower cost alternative to borrowing, the scale of the funds they have available is insufficient to replace the lending being done by the payday lenders. Additionally, credit unions generally take a little longer to approve loans and this might be prohibitive for customers who need immediate cash. The harsh reality is that without payday lenders, many of their would-be customers could fall into the hands of the unregulated ‘loan sharks’.

While certain of the practices of the payday lenders might be condemned, their very existence and proliferation in recent years highlight both the current problem of falling living standards for many families and the underlying issue of financial exclusion from mainstream financial services for thousands of households in the UK.

Activity 6 The effect on your credit rating?

Timing: Allow about 5 minutes

What do you think will be the impact on your credit rating of getting a payday loan?

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The impact is likely to be adverse. It indicates that you might have no access to other, cheaper, forms of borrowing and is suggestive that you have poor financial management skills. For some lenders it is a ‘knock-out blow’ if they discover from your credit history that you’ve applied to them for a loan or a mortgage.