This is Money Blog

Payday loans predators bite us all

What a truly uplifting experience it has become looking for a loan if you are utterly broke and have been turned down almost everywhere.

I’m not being sarcastic: a whole host of jolly companies have sprung up over the past four or five years offering ‘payday’ loans to those who do not have enough money to last until their next pay day. The websites are a joy to visit, peppered with pearly-toothed, attractive people having hilarious fake telephone conversations, surrounded by exclamation marks and phrases such as ‘Instant answers! No faxing of documents! Up to £750! No more worries! Typical APR of 1,355%!'

Er, what was that last one again?

Yup, you didn’t misread – these companies have APRs higher than the monthly salaries of most of their customers. Sure, they’re providing a much-needed service to those who find it impossible to get credit elsewhere. Sure, if you need an extra £100 one month and pay back £125-130 the next payday, what’s the harm? Everyone needs a helping hand, right?

Wrong.

They’re not providing a service; they’re lining some budding entrepreneur’s pockets – much to the misery of people trying to make ends meet. I would love to know the percentage of these loans that are actually repaid in full the following month (and I won’t as e-mails enquiring about this to two of these companies, Payday UK and Samedaymoney, have disappeared into the ether). 

My guess is that a relatively small proportion of borrowers in this position are a sure bet for repaying on payday. Loans like this make companies more money by burning away like unquenchable embers, so that the borrower will never truly be able to put out and they eventually consume them.

Take the theoretical case of downtrodden Joe, a labourer who had to hire a van to move flat this month and who is now £100 short, which he needs to pay his council tax. He could really scrimp to pay it off, borrow from family or friends, but pride sends him to a payday company.

The £30 he pays them pushes him out again next month, or he leaves it for a while, leading to a bigger headache the next month.

These ‘deals’ are exploitative like those credit cards provided by Provident Financial – the doorstep lender – which has a rate of 39.9% on its Vanquis Visa card on limits up to £1,000. Its ‘pre-paid’ card (read: defacto credit card), has a rate of 183.2%.

Preppy advertisements highlighting these offers are no different to the TV advertisement by Picture Loans criticized by the Advertising Standards Authority last year for trivialising large loan applications.

A mother organizes a £25,000 loan while doing household chores and dealing with her kids. ‘Oh that’s such a help, thanks so much,’ she quips. Unsurprisingly, she fails to add, ‘That should pretty much scupper any chance I have of paying for this lots' higher education, or having a comfortable retirement. You really have been a help. Thanks soooo much.’

Don’t even bother blaming the loan applicants themselves. Many of us hit out at the borrowers, but of course you’re going to jump at any offer of money if you are utterly cash-strapped and it is practically thrown at you.

You’re also kidding yourself if you think this will only affect poor downtrodden Joe and not you and me. This is exemplified quite conveniently for me by the whole credit crisis kafuffle. Lots of ‘sub-prime’ riff-raff can’t pay the mortgages they were handed on a silver platter, no questions asked, this gets packed off into the now oft-quoted ‘securitised debt’ packages, sold off en masse to financial companies, these companies never see a bean of the repayments, they suffer billions in write-downs, have their credit crunched and then we end up with, oh, the credit crunch.

Cue mortgage rate rises, credit limit cuts, falling house prices due to reduced demand and a rise in inflation (resulting from years of said easy credit).

Suddenly, downtrodden Joe’s short month eventually has a knock-on effect on privileged Ophelia: she can’t go inter-railing this summer because Mummy and Daddy overstretched themselves on cards while holidaying last summer. Their mortgage has gone through the roof, the value of the country bolt-hole has plummeted and, who would have guessed, the price of everything from Chevre Log to Lacrosse kits has shot up.

Sift through the entrails of the credit crunch behemoth and you’ll find the Citigroups and Merrill Lynchs, which swung their jaws wide to swallow thousands of the aforementioned debt packages. Deep within them, you will find the sleek predator that is these exploitative loans.

And within them, you will just find someone who just couldn’t make ends meet one month, and so filled out a loan application.

ICICI's bully-boy tactics fail to impress

Google Indian bank ICICI at the moment and you’ll find more than just information about its best-buy savings rate: the Indian Supreme Court accused it last week of using musclemen to harass its customers into repaying their loans.

New Delhi’s Supreme Court said it used these musclemen or ‘goondas’ to pressure its customers into repaying defaulted loans – allegedly driving one to suicide. Read the full story here.

Naturally, the point of the story was not to imply for one minute that the bank would consider using similar tactics here in the UK. I am interested however in what British savers think of this, and whether they would consider lodging their savings with an institution that allegedly is not afraid of using heavy-handed methods to keep its customer base in its home country in line

The details of the case shed light on a situation that seems draconian even when compared to some of the worst debt collecting agencies in the UK. Can you imagine a bank allegedly pushing their way into the bedroom of a customer here in the UK and dealing them a barrage of abuse?

People who default on their loans here don’t know how easy they have it: even a mildly intimidatory letter from a bank can be reported. Customers are not so well protected in India it seems.

On the rare occasions when these banks are caught out, the fines are miniscule, £300 paid to the deceased customer in ICICI case (again, read the link to the story above). There is the reputational damage, but is this really severe when the entire Indian banking system has been indicted?

Then again, this heavy handedness is unknown in the UK, so perhaps the banks will suffer more over here.

The question of whether foreign banks are safe depositories for our savings has been a heated issue over the past few months following on from the Northern Rock affair and fears over the Icelandic banking system.

But perhaps we should be asking in addition to this whether they are also ethical homes for our savings?

There are other reported cases of ICICI’s alleged harassment of customers in Indian publications and on the internet, this is not an isolated issue. It must be said that similar searches on such foreign banks as the Turkish Akbank and First Bank of Nigeria do not yield similar results to the ICICI situation.

In the interest of fairness, I asked ICICI whether the widespread reports of the Supreme Court ruling were true and, if so, how did they wish to respond. Frustratingly, after a day and a half of discussion via its press relations agency, ICICI refused to deny or accept the claims and instead issued us with this statement instead:

‘ICICI Bank is extremely committed to the highest standards of corporate governance. We have committed 1% of our annual profits towards the cause of sustainable economic development and inclusive growth in India. Our diverse efforts across India can be seen easily at www.icicifoundation.org. As part of our operations across 19 countries in the world, ICICI Bank UK plc was launched to offer UK savers a better deal with great rates and no hidden catches.’

This is Money had lengthy discussions with ICICI over this article. ICICI’s public relations team stressed the need for balance, the potential for damage to the bank’s reputation and ICICI’s need to have its say. In light of this, I think it is not unfair to say this statement is a deeply unsatisfactory response for any UK customers who may be concerned about the bank’s practices in its home country.

Either way, reports such as those coming from India merit further investigation, given the fact that ICICI accounts for a third of all consumer loans in India and the personal loan market grew by 30% in India in 2006. Not only that, but the bank is gaining increasing prominence here: it told us it had 80,000 UK customers last November, growing at a rate of 5,000 every month.

This ICICI UK customer base of approximately 110,000 and the rest of Britain’s borrowers are in no danger of being roughed up over a loan. The UK has adequate checks in place to prevent this kind of thing. The question is, how do we feel about those who are not afforded the same luxury?

Credit crunch? Bank are throwing loans away

Praise the Lord, I’m in the money. The pity is that it’s not actually mine; it’s my banks. They won’t stop throwing it at me, despite my protestations. But, wait a minute, aren’t we supposed to be in the throes of a credit crunch?

That’s the problem, you see, we are. So much so that banks are falling over each other to seduce High Street customers with great savings rates. They’re also keen to sever off any dead limbs, such as those customers that borrow money but always pay it back on time, robbing them of much-needed interest in the process. Could Egg please stand up?

But as they push these hapless customers away, they are just as keen to grab hold of another type and press them to their bosom: the borrowers that take on debt and can handle it, but only just.

That’s why I constantly got loan offers and unsought-after overdraft increases pushed through my letter box. I’m one of those people who spends like crazy, racks up debt, pays my due in interest charges, gets scared and then lives frugally for a time to pay it all off.

Banks like people like me now more than ever, mainly because we’re money-earners; they can lend to us, make a killing, but suffer little risk because we always come good.

Happy days all round? Not exactly. Anyone would be a fool to take advantage of many ‘deals’ now being offered by banks to some customers. They’re an expensive sweetner aimed at sugar-addicts who are liable to go on an all-out binge and line the chocolatier’s pockets in the process (we’re still talking about debt here).

For example, I have a modest overdraft with NatWest which is pushed to the limit at Christmas and when holidaying, but is always reigned back in. I have practically no credit card debt. As a result, I receive regular overdraft increases completely out of the blue that are absurd relative to my income.

I have now got an overdraft limit of over £5,000 which, at an interest rate of 19.41%, I will never use. Add to this offers of £10,000 loans over five years at a rate of 10.4% which, I must remind myself, I do not need and will pay £6,400 in interest for the privilege.

For the bank though, the offer makes complete sense because it’s all about making money.

Similarly, a colleague recently received a letter from Barclays offering secured loans of £15,000-100,000. It said it would waiver the £995 arrangement fee if they took up the deal before May 20, but this ‘deal’ was presented in terms of low monthly payments, not the total amount repaid.

A loan of £15,000 at a monthly rate of £155.22 over 300 months (these were the figures quoted) amounts to a total repayment of £34,566 (not quoted). The £100,000 would result in a repayment of £230,433 over the same period.
Why not look into remortgaging instead? And is encouraging people into ludicrous loans over 25 years now considered responsible lending?

I suppose the catch-cry of the banking industry is that it is just fine as long as the person can afford to make the repayments.

There’s also the credit crunch; banks need the money, and everyone needs them to stay afloat.

After all, the end justifies the means. Doesn’t it?

Why do you hate people in debt?

It’s becoming an increasingly frequent occurrence on the site: we write a story about debt or bank charges and a slew of often quite nasty reader comments about indebted people follow.

Recent figures from the Insolvency Service show less of us fell into chronic debt in 2007, but several factors point to the possibility that personal debt will spiral again in 2008.

Now this may sound harsh, but it seems that many of our readers couldn’t care less about this. And what’s worse, are keen to condemn those who find themselves on the brink of insolvency.

All it takes is a quick look at the Dealing with Debt section of This is Money to confirm this. Why not have a look? A story entitled ‘Bank amnesty to help badly indebted’ details how those who are chronically in debt should find it easier to pay back the majority – though not all – of their debts in 2008.

With no small measure of sarcasm, ‘Don’ from Birmingham, posts this comment beneath the story: ‘I was offered umpteen credit cards and accepted them all, some at 30%. I am now heavily in debt but had a lovely time spending their money. I have no house, nor property and am on long-term DSS benefits.

‘Of course I can't pay it all back but the companies should never have lent me any money in the first place. They are the money experts, not me, so tough on them. Everyone should knock these companies. I don't lose any sleep over them. “Live within my means?” Don’t make me laugh.’

Before I respond to this, let me put my cards on the table. I’m not chronically in debt, so my defense of those indebted people in my articles is not fuelled by self-justification. However I did rack up over £15,000 worth of debt over four years at university despite relatively well-paid part-time jobs and quickly found the interest, living costs and bank penalties too much to deal with.

Thankfully, my parents stepped in and paid it all off, but if they hadn’t, I think I’d still be caught in the debt spiral. My point is not all chronically indebted people are greedy or incompetent. In order to get an education today, you have to be either rich or a genius and many would view an education a necessity, not a luxury.

Perhaps that’s why I find the attitude of some of our readers towards those in debt slightly discomforting. It sometimes borders on the self-righteous view that all indebted people are spongers.

Yet the figures from the Insolvency Service show that an increasing amount of indebted people are owning up to their debts and making amends: the majority are volunteering to take part in debt solutions such as bankruptcies and Individual Voluntary Arrangements (IVA) instead of being forced into them by their creditors. And living under an IVA is a frugal, sobering experience, which could be seen as a genuine attempt to pay back a large part of debts that had gotten out of control.

This may also be verging on the sacrilegious, but surely creditors should also take some of the blame for our nation’s £1.3 trillion worth of personal debt?

The caustic comments that often follow many of our stories on bank charges take the view that the indebted bank customer is to blame for invoking the penalties at the centre of the current bank charges High Court case. It’s as if the credit provider is entirely blameless for throwing the doors to its coffers wide and sitting idly by while they are ransacked.

If the ‘unauthorised’ overdrafts that give rise to these penalties are the equivalent of theft, as if often implied, then they are also the equivalent of inviting someone into your home to take your personal possessions, then charging them for the privilege, but not informing them of this ‘entry free’ before they set foot over the threshold. And it is this ‘open door’ policy that takes advantage of those most in need, who jump at any extra scrap of credit they are offered every month.

Just look at any of the reader comments on any of the stories on our ‘Reclaim bank charges’ section, or the story ‘HSBC in row over £25 stealth charge’.

In our rush to condemn these seemingly gormless people who can’t handle their own finances, we’re forgetting the real moral issue underpinning the problem of chronic indebtedness: are these charges that have led people down the garden path morally defensible? Of course they’re not.

But as we’re dealing with ‘poor’ people who lack the common sense to handle their own affairs, why bother even thinking about it when a glib comment will suffice?

Hello? Egg cut was on the cards

So if 3m people were rejected by credit card companies last year and the world is in the grip of a credit crisis, why is anyone surprised that 7% of Egg credit card customers were given the chop?

Okay, there’s a big question mark over whether it was indebted customers or squeaky clean customers who paid off their balance every month that were given the heave-ho. But the premise is still the same: lenders need to tighten up their balance of payments, so rather than get rid of their risky customer base that makes up the majority of their revenue, why not get rid of the deadweight – those that regularly use credit lines but rarely fall foul of interest rates, generating zero profit?

Whether it is ethical or not, this business is merely acting like a business and reducing its debt ‘on paper’.

Egg may have said that the act was not in response to the credit crunch but the result of a strategic review following its acquisition by Citigroup 12 months ago.

The fact that any review of a credit card business will surely encompass possibly one of the most disruptive corrections to credit markets in history is of course overlooked.

As is the fact that Citigroup took a huge hit from the credit crunch itself and was surely keen to limit its risk.

My point is, the writing has been on the wall for quite some time. The average unsecured debt of UK households with any unsecured loans is over £20,000, that’s without factoring in average mortgage debt of £33,000. The nation has £1.3 trillion of personal debt, over a third of us spend more than we earn each month and over half of us have to rely on our overdraft to bridge the gap between our outgoing and income.

This year was always going to be tough; scissors were bound to be unleashed upon the credit lines that have increasingly become our friends. The only difference is that Egg have perhaps laudably come out and announced their cull directly rather than do it surreptitiously like some other providers (see the link below on the Co-operative Bank).

The good news, as I have reported on the site today, is that this withdrawal of credit will not adversely affect your credit rating unless it was already in tatters, and may even benefit it.

As some of our readers have contemplated on our message boards, there is no point in trying to sue Egg for slander for calling you a ‘high risk’ customer(they haven’t named anyone individually, so that’s a dead end). Also there is no point in requesting information from Egg on why they are preventing you from using their services: all lenders have different lending criteria and have no obligation to explain their reasoning to you and me.

So if you are one of those squeaky clean customers whose feathers are ruffled because you’ve been declined further credit, my advice is to vote with your feet and simply go elsewhere. As our best-buy credit card tables show, there are better deals out there and, as you are whiter than white in credit terms, why not take advantage of them?

If you are a customer at the riskier end of the spectrum, quite frankly, this is where you may as well view Egg’s line as tough love, then grin, bear it and slowly but surely start to pay off your existing balance without relying on other lines of credit.

In a way, this was inevitable: you cannot rely on credit lines forever. In a worst case scenario, perpetual reliance on ever-increasing credit ends in bankruptcy.

Perhaps a polite letter from Egg now, expected or otherwise, is better than a slightly stronger-worded letter from a debt collector somewhere down the line?

- Alan O'Sullivan, This is Money

What are banks playing at?

You could say that my first four months covering saving and banking here at This is Money has been a baptism of fire of sorts: less than three weeks into the job, the country experienced the first run on a UK bank since Overend and Gurney in 1866 with the fallout from Northern Rock.

But surprisingly, it is not the aftershock of the ever-widening credit crisis that sticks in my mind when recalling the last few months – it’s the more frequent complaints received by hundreds of banking customers over the little things that dent their trust in our financial institutions.

This is perhaps less headline grabbing than the tentacles of the sub-prime mortgage crisis in the US, which is slowly spreading throughout global financial markets, but it affects the daily lives of our readers and, arguably, takes a much greater toll.

These include a range of issues that we have all had to deal with at some point in our lives: hidden charges on accounts, rate offers that seemed wonderful when we signed up to them but swiftly disappeared 12-months down the line, unanswered complaints and, last but not least, a curt and indifferent customer service ethic that flies in the face of our industry’s Treating Customers Fairly guidelines.

Is it any wonder the world and his aunt queued for hours at Northern Rock to withdraw their cash, when many of them had been dealing with a banking system that treats them like second class citizens? Who would trust Alistair Darling and Adam Applegarth’s pleas for calm when it just sounded all too similar to an indifferent member of a bank’s call centre telling you your complaint ‘will be dealt with over the next week’, only then to find nothing has been done?

One way to begin tackling this is to ask what ‘FSA regulated’ actually means. There needs to be some form of ‘real time’ regulation of banks’ complaints procedures – involving the Banking Code Standards Board, the FSA and the Financial Ombudsman – as the current process is clearly failing customers: they contact a bank with a complaint, spend weeks enmeshed in its complaints procedure followed by weeks of dealing with the Ombudsman, leading to untold stress and dissatisfaction.

Another way to cut down on lengthy complaints procedures and customer dissatisfaction is to prevent complaints to begin with. The solution to this is simpler than it seems: banks should be upfront with savers about the services a bank has to offer, with no hidden charges or tricky clauses in the small print.

For example, bonuses and rate guarantees on savings accounts tend to obscure an account’s real rate. Sure, it’s in the small print, but customers frequently feel short-changed when they suddenly realise that, after 12 months, their table-topping rate has suddenly fallen into insignificance.

This is made worse by the fact that over half of rate guarantees only guarantee that they will ‘track’ movements in the base rate, all the while paying a consistently lower rate.

It would help to lessen savers’ perceived injuries if they were given several weeks notice of all interest rate cuts, allowing them to move accounts if they so wished. A good example of how rate notifications should not be done comes in the case of Abbey – one of 2007’s worst offenders in the field of customer service: it cut its savings rate on 1 January, following the base rate decrease in December, but did not publicise this until 2 January.

It often seems like banks base their business model on getting in as many customers as possible, whether or not they have the support structure to deal with them, and then leave them languishing in complaint procedure hell.

I attended a conference run by price comparison website Moneyfacts last year, in which the topic of discussion was how banks deal with their customers. The CEO of Moneyfacts Group Paul Pester seemed to hit on the zeitgeist of those attending by remarking that many banks focus on bringing in new customers to the detriment of their existing customer base, something which he said ‘destroys trust in the industry’.

One issue the industry needs to look at is how can this trust be restored; one question that jumps to my mind, given my experience of some High Street names over the past few months, is does the industry actually care enough?