As CEE highlighted in a recent discussion paper, people who take out such loans are usually in a state of some desperation, in need of money not for luxuries, but to cover everyday essentials (such as bills) or unexpected emergencies (such as a broken washing machine).
In contrast to responsible lending standards, payday companies accept – indeed welcome - customers who are unable to repay, on the basis that they will roll over the original loan and borrow more to cover the repayments. Thus a short-term fix quickly becomes long-term indebtedness. It is estimated that payday lenders make 50% of their profits in this way.
Such practices mean that, even in a climate unsympathetic to the circumstances of the poor, there is considerable public hostility towards payday companies. Indeed Sheffield Wednesday FC recently rejected a lucrative sponsorship deal with a payday lender for fear of a public backlash.
Public concern has also prompted the Office of Fair Trading to ask the Competition Commission to investigate the industry. This could lead to tighter regulations, including mandatory credit checks and limitations on rolling over loans. But whatever the outcome, ensuring that people do not resort to expensive credit requires broader progress – tackling unemployment and low pay, and ensuring that people have a reasonable safety net.
Judging by George Osborne’s speech in the House of Commons last week, the portents in this regard are not encouraging. Setting out his spending plans for 2015/16, the Chancellor made clear he remains committed to the same path he began on three years ago. This is despite the fact that since he took office, the UK unemployment rate has remained unchanged at 7.8% while GDP growth has totalled just 1.6%. The Chancellor rightly pointed out that he inherited huge problems from New Labour but the fact remains he has failed to turn things around. Lamentably, he is yet to address the practices of the financial sector which caused the crash.
Instead of setting out a programme for improvement the Chancellor resorted to scapegoating. Non-English speakers will be denied benefits unless they attend English classes, and the newly unemployed will have to wait seven days before they can claim benefits.
These measures will do little to improve the public finances or the wider economy. But they could have a profound impact on precarious household finances. For example lengthening the number of days before an unemployed person can claim benefits to seven (there is currently a three day wait for claiming Job Seekers Allowance) seems marginal, but for many people it could mean reaching the tipping point at which payday lenders become the only option to make ends meet.
In this context Osborne’s speech was a rather disturbing spectacle – a Chancellor presiding over economic stagnation, blaming the victims of unemployment and low wages, further reducing their safety net and exposing them to the spiral of payday debt. It is an ominous sign of the future of poverty.
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