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Home Insights & Advice Amount of payday loans taken is increasing consumer debt

Amount of payday loans taken is increasing consumer debt

by John Saunders

According to the Financial Conduct Authority (FCA), over 5.4 million payday loans were taken in the year to June 2018, an increase from 4.6 million on the previous year.

The average loan value was £250, whilst the average amount paid back was £413 – a whopping 1.65 times the average amount that was initially borrowed.

This current trend continues despite the amount of payday loans companies reducing, with many like Wonga going out of business.

The FCA indicated that households in the North-West are the most likely to take out a payday loan, with 125 payday loans per 1,000 adults.

The North-East closely follows this borrowing with 118 loans per 1,000 adults and London with 114.

Alarmingly, Londoners are borrowing much more than other UK individuals with the average loan amount totalling £284 each, £49 on average more than the North-East and North-West.

The borrowing demographic for payday loans are in the 25-34 age range, with 26% of loanees living with their parents, and 30% being tenants, indicating that 56% of payday loans are supplied to millennials who do not own any property as collateral to fall back on should more financial problems arise.

A vicious cycle of debt

Individuals who take out payday loans are more likely to have concerns repaying their debts, and entering a vicious cycle of debt, according to the debt charity StepChange.

StepChange reports that by 2018, 18.3% of their clients had a payday loan or other short-term debt.

Sadly, high-cost short-term credit is the only form of credit who accepts people who are struggling to meet their monthly financial expenses, yet when they take one of these loans, they find it challenging to cope from then on.

This rise in consumer debt is despite the FCA introducing a payday loan price cap on the amount borrowed – stopping short-term credit borrowers from repaying more than twice the amount owed, and charges are not permitted to exceed £15.

Since the cap was brought in, the number of providers in the short-term and payday loan market has decreased from 106 companies in 2016 to 88 today, including the most high-profile casualty Wonga, that charged interest rates up to 5,000%

However, whilst disreputable practices and firms being eradicated from the market, the demand for short-term credit amongst millennials only increased. Current payday loan borrowers are still met with interest rates in the range of 720% upwards.

Laura Suter, a personal finance analyst at AJ Bell, says: “these short-term loan figures are just one part of the UK’s debt problem – we also owed almost £45 billion on credit cards at the end of November last year, and another £6 billion in overdrafts.

“What’s more, half of the people say that keeping up with their bills and debt is a burden on them, which leaps to 89% of people who have payday loans.”

Reducing the debt burden

To reduce the debt you or your household has, the first step is to set a realistic budget so that you can get on top of your finances. Analyse how much you have incoming each month and knowing what you need to spend on will determine the optimal solution for working out how to repay your debts.

Some debts are more of a priority than others, so ensure that these are dealt with first with what available spare funds you have.

A general rule is to pay the debt with the highest interest rate first. Whilst this is sound advice, be wary that if you are a homeowner; missing mortgage repayments will have severe consequences for your house – defaulting on a mortgage debt will permit the bank to repossess your home instead.

Payday loans are costly, so this must be repaid as soon as possible without borrowing this type of credit again and thus avoid the cyclical debt issue mentioned above.

Credit card debt can be expensive, so it makes sense to repay this as soon as possible, yet if you can do a balance transfer, this will give you some breathing space to repay more expensive debt whilst only paying back the minimum payment each month on the balance transfer credit card. Be warned though, don’t add to your credit card debt, as adding more to it will negate the point of managing the debt in the first place.

Council tax is another vital bill to keep on top of. You could be sent to prison for up to three months if you fail to pay it. Whilst it carries the threat of a prison sentence, ask your council to determine a repayment plan that can make it easier to meet your repayments.

If you are worried about your debt, you should seek financial advice from a debt advice charity like StepChange, the Money Advice Service or the National Debtline.

David Bailey-Lauring is a single father of three boys so he knows what it takes to stretch a budget when it comes to family finance! David is a small business entrepreneur and regularly writes about entrepreneurship, tech, sport and personal finance in the UK, USA, and Europe.

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