This is our truth, tell us yours
The government has announced that it plans to cap the interest charges of payday lenders, even though it has reservations about the impact of the cap on the short term lending market. On such vacuous, naive, situational reactions are the politics of twenty first century Britain built.
A more careful analysis of the payday lending market might start from a simpler premise; why do people borrow from payday lenders?
Some do so because they’re simply bad at managing money, or driven by needs and compulsions greater than the need to make rational decisions about money. But there are rational reasons for borrowing from payday lenders too, and if you want to end demand for payday lending, you have to address those needs in a way that goes beyond the pious demand of those who are well off that the poor should make more use of credit unions. Like most forms of savings and credit, credit unions work best for people who have regular incomes and a stable budget – we haven’t yet evolved a credit union that would suit people on a zero hours contract and be sustainable. The dirty secret of the credit union world is that credit unions fail, for a variety of reasons which can often be fitted under either the headings of ‘wrong customer base’ or ‘wrong volunteer base’.
So, what are the rational reasons for using a payday lender? The answer lies in a seismic shift in models of consumer credit since 1974, and the pursuit of the lowest cost base by credit providers.
Imagine you’re me, Mr Miggins, pie shop supervisor of this parish. I have a mortgage, and a credit card, and a mobile phone. My outgoings are about 97% of my income, and I’ve spent all of my short term, easily accessible savings on Christmas presents for the little Migginses, a happy tribe who are looking forward to a jolly christmas with their new, no brand tablets and Primani clothing. So what if the credit card is maxed out and the bank won’t give me an overdraft? The money’s in the bank and we’re all happy.
Except. Except at the pie shop christmas party I turned my mobile on to try and heck for an email from Mr Miggins Snr, who is in a nursing home but still good with technology. I left it switchd on, and it’s tried to download an email from my brother, who had sent me a video of the Miggins tribe in Koolapie, New South Wales, singing Merry Christmas.
My mobile phone bill is £86, and I don’t have the money in the bank to pay that, the mortgage and the minimum payment on the credit card.
If the direct debits bounce, for the mortgage and the credit card, I will have to pay £60. If I cancel the direct debit for the mobile phone, my mobile will be cut off and I’ll no longer be able to be on call for the pie shop, which could cost me my job if the pie shop owners ever find out. If I cancel the direct debits for the mortgage and the credit card I will have to pay charges to the credit card company and the mortgage provider, my credit rating will go south and I’ll find it even harder to get credit.
Suddenly a payday loan starts to make sense. The key thing is that the motive force for taking out the loan is the cost of the unexpected; the ‘charges’ levied by credit providers that are not actually charges, but fines.
Credit providers used to rely upon an army of debt collectors and tally men who knew their patches intimately and knocked on doors to collect the money due. At the very bottom of the credit pyramid was the humble catalogue, with its network of paid agents who were neighbours of their customers and used moral force and their local knowledge to manage and assess risk. Fining people whose payments were late was much more cost effective, and much more manageable. It also made payday lending a good economic option for those faced with fines that would greatly exceed the cost of the mainly automated processes that lie behind the fines for late payments.
Want to end payday lending? An interest cap isn’t the answer. A little root cause analysis is, and the root cause of demand for payday lending is the sheer cost of the unexpected.