The UK, which like the US went on a binge of consumer debt creation, is similarly in the hangover phase. Individuals are increasingly resorting to the refuge of the desperate, namely, payday lender. From the Times Online:
Consumers are increasingly turning to short-term loans charging interest of more than 1,000 per cent to tide them over until they get paid. The number of so-called payday loans taken out by Britons has more than doubled in the past ten months as shoppers struggle to cover their monthly bills, figures calculated for The Times show.
The growing strain on consumers’ wallets prompted by soaring fuel and food prices has caused a boom in business for lenders of short-term loans at high rates of interest. The number of deals taken out in the UK has risen by more than 130 per cent since last August, according to figures from Moneysupermarket, the price comparison website. These payday loans are already popular in the US and have been blamed for exacerbating the housing crisis there.
Payday lenders, such as Payday UK, Express Finance and Pounds Till Payday, offer loans of up to £1,000. Payday UK demands that £125 be repaid for a £100 loan, or £937.50 for a £700 loan. The loan is usually paid off within a couple of days, as soon as the borrower’s wages are paid into their account.
Payday UK said that the typical annual percentage rate (APR) for its deals was 1,355 per cent. The typical rate for a credit card is 20 per cent, while a high street bank charges about 18 per cent on an overdraft.
One of the arguments made in defense of payday loans is that they are cheaper than incurring overdraft fees, which appears not to be relevant in the UK. Another contention is that the only other recourse for those in need of cash is loan sharks (again, not completely true, since research has found that the lower income often hit up friends and family for short term loans).
I was recently on an NPR show on consumer debt, and a caller said his uncle, a former loan shark who did 15 years in prison, was mystified by payday lending, particularly since he had charged only 17%.
The problem with leaving this service to the underworld at this point is that the private sector has now shown how much the market will bear.