Payday loans for those in trust deeds should be banned?

18th July 2011

Throughout the second half of June speculation was rife amongst the media that MPs at Westminster would vote to cap the costs of payday loans. The Labour MP leading the campaign, Stella Creasy, describes such lenders as ‘legal loan sharks’. She wanted to see an amendment to the Finance Bill which would cap the costs of such loans. However, we believe such legislation should maybe go one step further and ban payday loans completely for those in trust deeds .

The timing of the vote was interesting, with Moneysupermarket reporting in May an increase in demand of nearly sixty per cent in demand for such lending.

The campaign was lost, with a majority of MPs voting against the amendment. The main argument presented by the government was that payday loans provided a service to those individuals who could not obtain credit elsewhere. There is some strength to this argument, especially as the penalty costs imposed by High Street banks (who don’t seem to want to lend any more) for going over an overdraft limit could in fact exceed the cost of payday loan interest.

We believe that MPs may have partly missed the point. At their best, payday loans offer a convenient source of short-term cash to an individual with a pressing need for cash who can repay the loan when they’re next paid. With the banks closed to anyone with imperfect credit histories, this service can be valuable.

The danger of payday loans is the debt spiral which can worsen for any individual already struggling with debt. The advisers at the trust deeds forum website Trust-Deed.co.uk regularly speak with people who have four, five or even six payday loans. Generally, one has been taken to pay off another while the financial dependency created takes an ever-greater hold. This situation cannot (and does not) end well for the borrower or the lender.

Even worse is a situation where an individual who has already acted to deal with their debt, trust deeds for example, then commits to a the terms of a payday loans. As a recipe for disaster there are few surer methods as the budget on which the trust deeds payments have been determined will not include provision for repayment of a new debt.

When a payday lender is loaning to an individuals in trust deeds they should know that the individual does not have the means to repay it. However, many lenders will not even be aware of the existence of trust deeds as many will neither ask nor check; classic irresponsible lending.

On the other hand, is depriving individuals in trust deeds the opportunity to use payday loans to cover their short-term needs unfair? Not necessarily. There are mechanisms by which trust deeds payments can be temporarily suspended to enable the payment of unforeseen costs. This renders payday loans to individuals in trust deeds totally unnecessary.

The Government does not necessarily need to cap the costs of payday loans as they can help individuals that can afford to repay them. It would be a simple step to require payday lenders to check their potential borrower against the publicly available registers of trust deeds, sequestrations and debt arrangement schemes. This would prevent payday lending to people who de facto cannot afford to repay the loan.

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