Researchers to investigate the payday loans market
The lifestyles of people who take out payday loans and the consequences of such lending are being examined by researchers at Teesside University.
Depression, anxiety, ill health and further financial hardship are just some of the implications associated with the controversial form of credit.
Academics at Teesside University have launched a research project to find out more about the types of consumers who consider payday loans and the consequences it has on their lives. They are also examining what tactics lenders use to “lure” consumers and what makes people under significant financial hardship turn down payday loans in favour of alternative forms of credit.
The £9,000 research project has been funded by Teesside University and is led by Professor Mark Davies, from Teesside University Business School.
The research team are urging people who have taken out payday loans to volunteer to be interviewed about their experiences in order to build up case studies of consumers.
'We want to understand more about the psychological effects of these loans on personal finances, the impact on their quality of life and health, and the likely impact on the local economy,' explained Professor Davies.
'There is a perception that people who get into difficulty with payday loans only have themselves to blame – that they are being irresponsible and want to buy luxury items. That is not necessarily the case. A lot of people who take out these loans are hardworking people, but are in low paid jobs and are being squeezed at both ends. They need money to pay for essentials such as food and petrol to get to work and see this form of credit as the most viable solution.'
Payday loans are short term consumer loans for immediate cash, often secured by the borrower’s post-dated cheque. Typical loan amounts range from £300 to £500 and are taken out between a few days and a month. Interest rates can be as high as 4,000% APR – though lenders argue that they have to charge high interest rates as the money is borrowed over such a short period, as opposed to a typical bank loan which can be taken out over several years.
Professor Davies added: 'People take out payday loans because there is a culture of acceptability – they think it is okay. I personally believe it is unethical to charge such high interest rates, but those taking out the loans are not concerned about the interest rate – they just want to know if they can pay it back in time and the true extent of what they are paying gets lost.
'There are other alternatives, such as credit unions, but they can’t compete with payday lenders as they don’t have the same budget. People are reluctant to go to banks as they are afraid of getting turned away – they don’t want to lose their dignity.'
Despite tougher new regulations and increased scrutiny in recent years, the payday loans industry is still estimated to be worth £2.2 billion. There are 240 lenders operating from 1,238 locations across the UK.
A particular area of criticism is how vulnerable people are perceived to be targeted at specific times, explained Professor Davies.
'One strategy used by payday lenders is to target people during special events and festivities, such as Christmas, when the public are most in need of financial top-ups to pay for additional goods.
'Other occasions when consumers are targeted include finding extra money to pay for school uniforms or to meet the expenses of summer holidays.
'Targeting can take several forms, such as texting people on mobiles several times in a day, calling on areas known for their history of taking out payday loans and increasing the prevalence of advertising during specific times. One could argue this is just good business practice, but to me it seems rather exploitative.
'If payday loans are not paid back immediately and transform into multiple sources of debt, they can have a devastating effect on family finances. Such problems can spread to the extended family, as one family member relies on others to help them out.
'Our research aims to find out more details about the objectives of consumers, how payday loans have affected them and what other alternatives people have used.'
If you have taken out payday loans and would be willing to talk anonymously about your experiences, please email Professor Mark Davies at map.davies@tees.ac.uk.
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