Now here is a scary figure and is perhaps why payday loans have become such a necessity in the fallout of boom-time house prices and the subsequent credit crunch: one in six of the debtors surveyed in the R3′s recent snapshot of UK borrowing are zombie-debtors.
That’s roughly seventeen percent of people in debt only having enough money to pay off the interest on their loans, store cards and credit cards and never actually impacting upon the amount they owe. What has some bodies worried is that the minimum payment is never quite enough to cover the actual interest so, instead of people actually clearing their debt by paying the least that they are contracted to, they are sinking further into debt, rather than getting out of it. With budgets that tight, it’s no wonder payday loans – often where no credit check is needed – are the only way that people who’ve spent up to their limits in the past can actually have a life. Hence, we have the term ‘zombie debt‘.
There are, as you would expect, two sides to the argument as to whether the actual consumers who’ve taken out payday loans vindicate the service the lenders provide, or not.
On the against side, which is the view Consumer Focus lent towards, the payday sector of the lending market are accused of having had opportunities to reform their practises to stop customers falling into ‘debt traps‘ yet have shown no evidence of doing so. The actual R3 report also suggested that more than two thirds of payday loan customers had turned to the sector as obtaining credit elsewhere was not an option. Consumer Focus also expressed concerns for vulnerable customers who were at the mercy of short term lenders who were being perceived as ‘flouting the rules’. That was not specifically represented by the R3 report, although they did concede that payday loans were ‘not the best way’ to tackle long-term debt problems.
In defence of the sector, the Consumer Finance Association who, along with the Office of Fair Trading, regulate and monitor all payday loan institutions, presented completely different findings altogether.
In contradiction to the sixty percent of customers in the R3 report who it is alleged regretted taking out payday loans, a recent survey by the CFA found that 94% of those questioned were happy with the service they had received after taking out bad credit loans in this manner.
They were also quick to act upon misleading advertising by Wonga at the turn of the year when they were, rightly or wrongly, accused of targeting students with one of their online marketing campaigns. The OFT objected, Wonga apologised and capitulated, end of story.
And with regards to practises, the payday lenders could not be found at fault by another OFT investigation and were abiding by the terms and conditions the sector set out which are governed by the FSA.
In conclusion, it is safe to say that any survey can be created in such a manner that it will produce the answers the questionnaire’s sponsors are looking to find (the people who designed them would not be hired again, otherwise – the ‘Food Pyramid’ is perhaps the best-known example).
It is also safe to say that, providing payday loans are used for their purpose and repaid on the agreed date, they can often be a cheaper alternative than missing a credit card payment or slipping into unauthorised overdraft lending, yet are not recommended for long-term debt issues. Guess that’s why they’re called ‘payday loans’, eh?