Tough Times Ahead For Families
While the plunge in mortgage rates eased millions of households through the financial crisis after the global meltdown of autumn 2008, balancing the books for many families could get much trickier from now on.
Broadly, expenditure is set to rise, while many people’s income will struggle to keep up. In many cases, incomes will fall as the Government cuts public spending.
For consumers, higher VAT means petrol rising by 2.5p per litre, cigarettes by 12p per pack and a pint of lager or glass of wine by 7p. Economic growth would fall from 1.25% to 0.75%, while the Consumer Price Index (CPI) would receive a healthy kick and 47,000 jobs could go in the retail sector as spending tails off.
Bruce Fair, Kelkoo managing director, says: “A VAT increase raises Government revenues significantly, but consumers are left facing an increase in the price of everyday goods at a time when salaries generally are being frozen and the overall tax burden is increasing.
“The combination of lower disposable incomes, and a reluctance to increase borrowing in the current economic climate, is likely to result in lower levels of spending.”
Plenty of evidence suggests discretionary spending - on things not absolutely essential - is falling: summer holidays, for instance, are widely discounted, vouchers slash the cost of eating out, clubland spending by younger people is taking a dive.
Looking forward, interest rates must rise. Investec Bank reckons one in three savers dipped into cash reserves in the past six months, while the website Moneysupermarket.com says five million people admit to regularly using a credit card to pay household bills.
A further 2.5 million people withdraw cash on their cards, potentially costing £90 million a year in fees because cash transaction APRs usually top 20%.
Kevin Mountford, head of banking at Moneysupermarket.com, says: “Used responsibly, credit cards can be an integral part of household budgeting, but it is alarming to see so many people using their cards to pay for what should be everyday spending.
“Funding a large purchase such as a TV over the length of an interest-free period makes sense. But consumers turning to credit cards to fund basic household bills on a regular basis should be hearing alarm bells, as this habit needs to be avoided wherever possible - it’s really a case of robbing Peter to pay Paul.”
This landscape is familiar to Gary Miller-Cheevers, who started Speed-e-loans as an online agency to provide payday loans in January 2010: his 14-strong team lends a total £250,000 per week to 1,000 applicants. The first loan, limited to £250, is to be repaid when their pay cheque arrives.
Alarmingly, Miller-Cheevers rejects 90% of applications: “This is a short-term fix for people who genuinely have an issue and will get paid at the end of the month. If they have unmanageable debts, we do them a favour by turning them away”, he says.
His company is a tiddler alongside other firms such as Pounds Till Payday. He estimates around 25,000 payday loans are handed over each week, although the figure could be higher if providers could access more cash.
Speed-e-loans customers earn an average £21,000 per year, or £1,430 a month, after tax. Just more than half - 53% - are female, and some use the money to pay dentists’ bills.
He adds: “Payday loans are typically associated with students, the unemployed and lower earners.
“In fact, when we analysed our first three months, over 50% of our loans go to white collar workers and professionals, and 7% of all borrowers are solicitors, accountants, doctors or financial advisors.
“Around 50% of adults in Britain have less than £200 in savings, but if they have regular income, we can often help.
“Our 600-point credit check, through Callcredit, takes seconds, and we check they are who they say they are, and that they work where they claim to work. The whole check takes seven minutes, and within half an hour, successful applicants have the money in their account.”
In many cases, however, Gary’s customers don’t have a bank account: “Often, the agreed overdraft facility on their bank account is cut from £1,000 to £500.
“When their account goes into credit, the bank closes their account and their debit card goes too. This happens to many people.”
To help those without a bank account, Speed-e-loans offers a pre-pay debit card in partnership with Mastercard, which costs £7.95 and can be loaded with the payday loan.
“In effect, people get an e-bank account”, says Miller-Cheevers.
“In 90% of cases, they pay all the money back in either the first month or the second month, while 10% of our loans go bad, because people lose their jobs or face a personal crisis which leaves them unable to repay.”
Borrowers who cannot meet the repayment date may incur a £9.95 fee - with interest accruing at a rate of 1% per day, or £1 per £100 borrowed. After one month, a £200 loan costs £260 to repay, after two months £320.
Calculated over a year - as required by Office of Fair Trading (OFT) regulations - this rate represents an astonishing APR of 2334%. A rival, PaydayUK, quotes a figure of 1737% on its website.
“The idea of using an interest rate compounded over a year is like asking Tesco to price steak by the ton,” he adds.
“Customers deal with us for an average 35 days: one pay day, plus a few days on top.”
According to Moneyfacts.co.uk, the average authorised overdraft stands at 14.22% - the Norwich & Peterborough BS Gold current account charges from 11.74% to 20.90%.
But payday loans are really for those who won’t get a sympathetic hearing from their bank manager.
Andrew Hagger, at Moneynet.co.uk, says: “Payday loan companies have sprung up in the last couple of years to target people who can’t ask their bank for a standard overdraft or a personal loan.
“If you use a payday loan on the odd occasion, when a cheque might get bounced or your electricity is about to be cut off, it is not too bad to borrow £80 and pay £20 back on top.
“The risk is that people rely heavily on payday loans, and use them every couple of weeks. Then they are really expensive.”
In some circumstances, payday loans can save money.
Hagger tracked the cost of asking a bank to pay two £75 cheques which take a customer £150 beyond an agreed overdraft limit: Lloyds TSB charges £155.54 for the first seven days, Santander £95.83, Alliance & Leicester £85, Nationwide BS £63.54 and Barclays £60.
He says: “On unauthorised overdraft charges, there is no common policy: some providers charge daily, some monthly, some both, so the level of charges varies widely.”
In the next 18 months, Gary Miller-Cheevers thinks the payday loans sector will double. He is meeting merchant banks to arrange new lines of credit.
He says: “High street banks won’t be able to help the man in the street as they used to do. The debt situation is terrible, far worse than many have yet realised.”
:: Information: Speed-e-loans (call 0844 879 3199 and visit www.speed-e-loans.com).