MSE News: Could payday loans be the next mis-selling scandal?

Alan_McIntosh

Alan_McIntosh wrote: »

So the irresponsible lender still profits, the social responsible lender loses out. This is a simplified example, but imagine this on a bigger scale, with multiple pay day loan companies, higher interest rates that have contributed to the client eventually going bankrupt.
.

Which leads me to the debt purchasers who buy these debts for pennies in the £ from these companies, and actually then profit significantly, whilst the community credit union which loaned members money loses out.

....but thats for another day.

SnowMan

cod3 wrote: »

Are the pay day loan companies a recent phenomenon?

A few years back when I was paid monthly and low paid, I often ran out of money and would just have to go without. No food or fuel, but survived obviously. Slim pickin's for a week or so as I don't think PDL companies were even an option.

No offense intended for anyone struggling. Mine is a genuine question.

Not sure exactly but pay day loans came into the UK possibly some time before 2003 or so see this article

jamesd

Alan_McIntosh wrote: »

Dividend payments in bankruptcy should be paid on what remaining owed on the original amount loaned, with payments for interest only being paid after everyone has their original money back.

That would be an unfair and discriminatory practice. The reason is that interest rates are often set based on risk of lending. If the lenders taking the higher risk suffer most then it becomes even harder for those who are credit-impaired to obtain borrowing at affordable rates.

I understand the attraction but there's more to it than just treating lenders as exploiters.

steve9214

When watching TV, pick an ad break, you get the first payday loan advert, next player gets the next and so on.
Highest APR wins.

Or a students drinking game - take one drink for every 100% of APR in each payday loan.

I had bad credit card debts - and they were only 20% APR.
Cleared them by thrifty shopping and becoming a "rate tart" for free interest cards.

oldvicar

To answer the question posed in the title of this Official MSE News article, "Could payday loans be the next mis-selling scandal?":

YES - Payday loans are currently being scandalized as 'mis-selling'.

As the prologue in italics (presumably MSE authored commentary) actually puts it:

payday and secured loans could be next on the hit list...

I take this as a statement of MSE.com 's intention, given the appeal for evidence in the epiliogue:

MoneySavingExpert.com.
Please let us know in the discussion below if you successfully argue you were mis-sold a payday or secured loan.

SHOULD payday loans be a mis-selling scandal? That's a much harder question. On the whole I would rather they were not.

SnowMan

jamesd wrote: »

That would be an unfair and discriminatory practice. The reason is that interest rates are often set based on risk of lending. If the lenders taking the higher risk suffer most then it becomes even harder for those who are credit-impaired to obtain borrowing at affordable rates.

I understand the attraction but there's more to it than just treating lenders as exploiters.

Paying back capital before any interest on an insolvency situation would of course have the affect of reducing the loaning of money to those who are over-indebted and likely to end up in an insolvency position. That would not be a bad thing. It would enable people to take control of their debts, by seeking debt advice for example, before debts spiral out of control and before people take out high interest loans for significant periods which is where debts really spiral.

What you are doing is redistributing money on insolvency from irresponsible lenders to responsible lenders. That has to be a good thing.

You can argue whether the solution to ensure capital is repaid first before ANY interest in an insolvency situation is too simplistic and too unfair. But I do think a solution that tightly restricts how much interest and charges by high interest lenders can be added on insolvency could be a solution here.

Effectively by changing the insolvency rules you are putting in place a system where a pay day loan company might no longer lend to someone who is over-indebted because there is no profit to be made. Even if it doesn't get to an insolvency position for an individual the knowledge of what would happen on insolvency would affect the negotiation that goes on for someone tackling their debts through advice.

I don't think some of the solutions that MPs have come up to deal with Pay Day Loan companies and their like such as controlling the rate of interest at which loans can be offered (i.e. maximum APR) to individuals is a good thing. It is well intentioned but won't work.

To me for personal loans who gets what on insolvency has the potential to be a more useful tool to control the lending by the likes of Pay Day Loan companies to those who can't afford to repay.

I think it would be really useful for someone to do some research on this possibility (perhaps somebody already has) and whether it would have any impact.

richardw

A tin of Napolina chopped toms at 94p is extortion compared to a non brand tin at about 49p.

~Brock~

Perhaps the next financial mis-selling scandal that should be demonised through MSE and the media in general is parasitic claims firms and lawyers that claim to be able to somehow get you out of your debts and take a load of money up front based upon this unlikely premise....only to disappear over the horizon (with the money) as soon as they find that the courts don't agree with their [STRIKE]fantasy[/STRIKE] interpretation of the law...including those surrounding contract fairness.

Perhaps this should be 'next on the list' eh?

If only FOS had jurisdiction over these firms.............

jamesd

SnowMan wrote: »

Paying back capital before any interest on an insolvency situation would of course have the affect of reducing the loaning of money to those who are over-indebted and likely to end up in an insolvency position. That would not be a bad thing.

Those who are over-indebted shouldn't be an issue here: responsible lending should be barring them from adding to their borrowing already, unless its to refinance to a lower rate or longer term that makes it more affordable.

The problem is for those who are working and have some late payments or other glitches but who would have to pay higher rates because of the increased loss that a lender would suffer to those of the borrowers who end up insolvent, say after becoming unemployed. It's not a free boon, it's paid for by all other borrowers in higher rates.

SnowMan wrote: »

You can argue whether the solution to ensure capital is repaid first before ANY interest in an insolvency situation is too simplistic and too unfair. But I do think a solution that tightly restricts how much interest and charges by high interest lenders can be added on insolvency could be a solution here.

The example given was a "high" rate that was a bit below common doorstep lending rates. If you haven't read the report of the [STRIKE]OFT[/STRIKE] Competition Commission's investigation into the doorstep lending market you really should, for it found that it provided a useful service at rates that weren't excessive for the service being provided. It also found that there would be merit from additional competition and tried to stimulate that with LendersCompared.org.

SnowMan wrote: »

Effectively by changing the insolvency rules you are putting in place a system where a pay day loan company might no longer lend to someone who is over-indebted because there is no profit to be made.

They may also no longer be available to those who have no debts but impaired credit. That's a harm to an otherwise innocent group. The inevitable result would be higher rates for other borrowers.

SnowMan wrote: »

I think it would be really useful for someone to do some research on this possibility (perhaps somebody already has) and whether it would have any impact.

The research may well be interesting, I agree. One conclusion is sure to be that rates would increase for all borrowers with impaired credit because of the higher losses on insolvency.

SnowMan

jamesd wrote: »

The example given was a "high" rate that was a bit below common doorstep lending rates. If you haven't read the report of the OFT's investigation into the doorstep lending market you really should, for it found that it provided a useful service at rates that weren't excessive for the service being provided. It also found that there would be merit from additional competition and tried to stimulate that with LendersCompared.org.

Yes I did read that, I think this is the report you are referring to.

I thought it was a bit superficial to be honest.

What I would have liked to have seen in that report was some sort of analysis of how many people who had resorted to high interest credit then managed to find their way out of debt and for how many debt spiralled into bigger problems.