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Payday Loans – All A-Loan this Christmas

It’s easy to get lost in the festive blur of December. Christmas shopping, work parties, catching up with friends you’ve been meaning to see all year. However, it can come at a price and this year it seems the price is higher than usual. Recent research carried out by the Money Advice Service has shown that 1.2 million people will be turning to payday lenders to make it through the festive season, while 32% of people plan to ramp up credit card spending.  
The rise of the payday lenders is perhaps one of the most worrying financial trends. Payday Lenders offer short terms loans, available quickly without many questions asked. In theory, this sounds a practical and efficient method of short term lending, however the problem for a borrower arises quickly if they cannot repay the loan as planned. The loans, by their very nature, are hugely expensive with sometimes astounding rates of interest.  
The rise in the use of payday loans is indicative of a hard financial environment. There is also an argument to attribute their rise in use to the number of TV adverts from companies such as Wonga we are now exposed to. Ofcom has estimated 397,000 payday loans ads were broadcast on UK commercial TV channels in 2012, up from 11,000 in 2009. Perhaps even more worryingly is that children, young persons, and poorer households are exposed through the airing of these adverts on children’s and daytime tv. Debt charities and consumer groups have warned that lenders are luring the unwary into taking on debt that balloons out of control. Labour has said it would force payday loan ads off children’s TV, treating them the same as gambling or junk food marketing. 
In May of this year, the Advertising Standards Authority banned a payday loan ad fronted by former bankrupt celebrity Kerry Katona which used the slogan “fast cash for fast lives”, on the grounds of irresponsibility. The Chief Executive of the Citizen’s Advice Bureau has criticized adverts of this nature saying, “Celebrity endorsements and cartoon characters used in the adverts draw a veil over the hardships caused by payday loans”.  
There seems to only be negative press regarding the use of this type of loans but their popularity must suggest there is a place for them? A study in 2010 said these loans provided a legitimate, useful, service that helped to cover a gap in the market, for example to cover an unexpected urgent bill.  They are sometimes seen as a sensible alternative to running up an unauthorised bank overdraft. It has also been suggested that it offers a legitimate means for someone to borrow money that otherwise would be forced to turn to illegal loans sharks. However, in a “cost of living crisis” when household budgets are being squeezed and bank have restricted their credit offers, these loans seem to simply offer people a means to spiral into more uncontrollable debt and ultimately allow people to live beyond their means.  
The government have recognised the need to cap the cost of payday loans. Last month, George Osborne announced that a cap on the overall cost of payday loans would “make sure hardworking people get a fair deal from the financial system”. Although it is positive to see the Government taking action, it must be asked whether this move goes far enough. This week James Benamor, founder and CEO of Amigo Loans, said “the government’s cap reeks of political gesture and while it might go some way to eliminate the crooks in the market, it won’t solve the bigger issues plaguing the industry which is clearer guidance on affordability”.  
Benamor stance highlights that ultimately even if the cap was 0% and payday lenders would still be giving loans to people who can’t afford the borrowing, making the capping of costs an academic exercise. He argues the regulator needs to act urgently and offer clear guidance on affordability, and implement harsh enforcement against the worst offenders.
With the pressure to deliver the perfect Christmas, it becomes all too easy to lose track of spending and for things to get out of control. For families who feel forced to opt for payday loans it seems their festive spending is set to haunt households like the ghost of Christmas pasts for the rest of the year. However, it isn’t all doom and gloom, there are ways to be savvy with credit or alternatively to attempt to reduce a post-Christmas financial hangover by setting and keeping to a budget.  Hopefully, by choosing one of these means, people will not still be paying off Christmas 2013 this time next year.

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