The looming payday loan crisis
In recent months, it seems the country has woken up to the payday loan problem.
The economic conditions of the last few years have created a perfect storm for easy credit. Banks have been sluggish to give loans after the credit crunch. The estimated million plus workers on zero-hours contracts may suddenly find themselves bereft of hours and much-needed wages. Even the most frugal and stable of households are feeling the pinch, losing £6,600 a year in real terms.
To fill this need and plug the gap, payday loan companies such as Wonga have confidently moved in and reaped the benefits.
In my constituency of Blaenau Gwent, it is a problem that only seems to be growing. Numbers obtained from Wonga revealed nearly 5,000 loans were given out in 2012 for a population of 69,800.
The average first-time loan is £167 and returning customers are getting £279. Blaenau Gwent residents are paying an average of 20.1 per cent interest on loans that last less than three weeks.
With six per cent growth last year, more than £1m is forecast to be borrowed – and that is for one year, from one provider.
The High Cost Credit Bill is due to continue its winding path through parliament in September. It could do much to stop further damage being done to the most vulnerable, though may never undo the damage already done.It will aim to regulate high cost credit arrangements and their providers, while controlling the advertising and communications surrounding the loans.
Until then, we have a responsibility to champion the likes of credit unions in our communities. For example, my constituency’s credit union has 560 members. Compared to the thousands of payday loans, that number is far too small.
We have a duty to tell people of these socially responsible services right on their doorsteps, services that will not result in a downward spiral of debt. We also have a duty to educate the next generation of borrowers and savers, with compulsory financial education in our schools that will engage students and prepare them for the real world.
We cannot wash our hands of this problem. We cannot pretend people know what they are getting themselves in for if the alternatives are a mystery. We cannot sit idly by and wait for an edict from parliament to solve this problem.
We have a responsibility to stop the payday loan problem from becoming a crisis.
Nick Smith is MP for Blaenau Gwent and a member of the Progress strategy board. He tweets @BlaenauGwentMP
credit union, legal loan sharks, pay day loans