Loan Sharks and Pay Day Lenders

It is estimated that 165,000 households in Britain use illegal money lenders and that many thousands are in serious debt to them. The borrowers are people with a bad credit history or who cannot manage their finances or whose income is very low. The current recession is blamed for the squeeze on people’s incomes and state benefits are rarely enough to fill the gap. In extreme cases, parents resort to stealing food.

The poor are fertile territory for doorstep lenders. If you are desperate and the kids haven’t eaten for three days, a person coming to the door and offering a loan seems like the Messiah. In fact, they are a pack of wolves.

Demands for action against loan sharks led to the establishment of official Illegal Money Lending Teams which operate across the country. They claim to have secured 222 prosecutions, assisted 19,000 victims and secured prison sentences on perpetrators totalling 150 years.

Debra Wilson wanted to buy a computer for her daughter as a Christmas present. The cost was £350 so she borrowed £500 from a money lender, accepting that there would be “a bit of interest” added to the repayments. A few days later, the lender said he wanted £750 in return, payable the following month. Mrs Wilson could not meet the terms and took out further loans, increasing her debt. At one point she was paying more than £2,000 a month and over seven years the lender charged her a total of £88,000, sometimes accompanying demands with threats of physical violence.

In Newcastle Crown Court, Judge John Evans told Robert Reynolds, Mrs Wilson’s lender: “You are a loan shark, a person without a conscience. Your behaviour was beneath contempt. Reynolds admitted a charge of harassment with intent to commit violence and received a suspended prison sentence.

The supposed legal sector of pay day loans is little better. For Wonga and other "legal loan sharks" it is a £2bn business. One million families are being forced to take out payday loans every month as they struggle to meet the rising cost of living, new research reveals today. A poll for Which?, the consumer organisation, shows that nearly 400,000 of them use the high-cost loans to pay for essentials such as food and fuel, while 240,000 need the money to pay off existing credit. Half of the people who take out payday loans find they can't cover the cost of repayments – which can attract interest rates of more than 5,000% – which means they are forced to take out new credit and spiral further into debt.

The poll by Which? found that 4 per cent of people, equivalent to one million households in the UK, said they had taken out a payday loan in the last month. Some 38 per cent of people who do so use them to pay for food and fuel, while 24 per cent repay existing payday loans. A total of 79 per cent of people, about 38.5 million adults, use some form of credit, while 44 per cent are worried about their household level of debt.

Seven in ten of payday loan users regret taking out credit in the past, while 49 per cent found they couldn't meet the high cost of payments, and 28 per cent said that, while they don't like being in debt, they saw it as a necessary part of their life. While the repayments and interest on a month-long loan may be initially small, borrowers get into trouble when they cannot pay back on time, or have to roll over the credit. What starts off as a small amount can spiral into tens of thousands of pounds.

Taking the pain

A report showed 43% of Scots say they struggle to make it to pay day.
The report by insolvency trade body R3 showed that, over the past three months, 539,000 Scots have taken on additional debt through credit cards, loans and increased overdraft facilities. According to the quarterly personal debt snapshot that equates to 13% of the Scottish population.

More than 200,000 Scots had taken out a high interest payday loan in the last year. But one in five Scots say that after receiving payday loans they then struggle to repay them.

R3 Scottish council member John Hall said: “It is extremely worrying that such a large percentage of people are struggling to make it to pay day and that many are using pay day loans to bridge the gap. These loans tend to have high interest rates and often those who use this type of credit find themselves in a vicious debt cycle, especially if they then experience a sudden job loss.”

John Dickie, head of the Child Poverty Action Group in Scotland, said: “With Government policies slashing family incomes and food and fuel prices soaring it’s not surprising that Scots are racking up more debt."

The Scottish anti-poverty network, Poverty Alliance, said there were issues surrounding the 400,000 Scots who are earning less than what is considered a living wage, estimated to be around £7 per hour, at a time when living costs are rising. Eddie Follan of Poverty Alliance said: “It is clear that increasing numbers of Scots are under pressure to make ends meet as the price of essentials like food and energy continue to rise. At the same time low pay continues to be a blight on too many of our citizens. The number of people who are in work and live in poverty is increasing.” He said those on low pay were “no doubt supplementing their low incomes with unsustainable and expensive debt”.

CAS chief executive Lucy McTernan said: “Our evidence shows that across Scotland, debt levels increased by 50% over the period of the recession, with the average debt among our clients reaching more than £20,000.”

Citizens Advice Scotland says four out of five young Scots have been in debt by the age of 21, and a third have owed more than £5000.

The Struggle to Subsist

Nearly half of all UK families need two or more salaries to cover the bills and live comfortably, a survey from Scottish Widows suggests. Families with more than one child rely even more on two salaries, 51% of whom say they could not cope without them. High household bills and debts are putting pressure on family finances .

The survey revealed that a quarter of UK families have no savings while a further 25% have less than £3,000, figures showed.

The average two-child household has more than £100,000 mortgage, loan and credit card debt, the survey found. This compares to just £82,000 average debt for families with no children.

"This reliance on two incomes to buy and run the family home means millions of households are effectively doubling the risk of financial hardship should one of the breadwinners become unable to work," said Richard Jones, Scottish Widows spokesman.

Another report informs us that more than 30,000 people became insolvent in England and Wales during the first three months of 2007 , an increase of 23.9% on the same three-month period in 2006 representing more than 330 personal insolvencies for every day of winter.
It reaffirmed predictions that 2007 will go down as the worst-ever year for personal insolvencies in England and Wales, surpassing last year's record total of 107,288.

And lenders are taking a tougher stance with debtors with 18% debtors looking to enter Individual Voluntary Arrangements (IVAs), a type of insolvency , being rejected by lenders. This is nearly double the rejection rate seen in the first three months of 2006.

Experts warn that a rise in UK interest rates , even a half a percentage point rise , could well push many people into insolvency.

As this article in this months Socialist Standard warns :-

"Sooner or later the bubble will burst, and it will be wage and salary earners without ‘independent means’ – drowning in debt – who are likely to be hardest hit, as the market economy solves a problem it created in the only way it knows."