National Debtline: Reliance on payday loans symptomatic of money troubles
Posted 2008-05-19
Individuals who are regularly relying on payday loans may have a serious underlying debt problem, according to one expert.
The National Debtline has stated borrowers regularly using short-term, high-interest loans are "over committed" and paying out more than they are earning.
Beccy Boden-Wilks, a spokesperson for the group, added: "If somebody feels the need to use a payday loan on a regular basis, its probably symptomatic of a serious underlying debt problem."
Ms Boden-Wilks continued to say that individuals should try to get themselves out of this cycle by taking a good look at their budget and getting help from their creditors or mortgage lender to make sure it is more manageable.
This follows news that the number of people taking payday loans has more than doubled since last September.
According to Tim Moss, head of loans at Moneysupermarket.com, people are resorting to this type of borrowing to cope with the increasing costs of food, fuel and utilities.
May 21st, 2008 at 9:07 am
Payday loan use has been growing in many western countries including the U.K., Canada, U.S. and Australia. In order to get a good handle on this issue, those who are looking at it should consider closely the alternatives available to the people who use payday loans.
For an individual who is facing the prospect of bouncing a cheque or missing an important bill payment, their option is to pay the fee associated with that or borrow enough money to cover the cheque or pay the bill. The cost of bouncing a cheque in the U.S. has been documented by Marc Anthony Fusaro, a professor of economics at East Carolina University. In a recent blog entry MotherJones commented on Fusaro’s findings: “the overdraft loans given by banks these days make payday lenders look like a bargain.”
To summarize, Fusaro found that “the median implicit interest paid by consumers is over 4,000%.” So if a payday loan customer finds him/herself at risk of bouncing a cheque, they can pay the bank 4,000% (the equivalent of paying $153.42 to borrow $100 for 14 days) or pay a payday lender $15 to $25 per $100.
There is also data out of the U.K. to suggest that borrowers there who have access to payday loans pay £26 for a £100 loan while those who do not have access to these loans pay £200 per £100 borrowed.
I have covered several of these topics on my blog if you are interested in reading more.