The central conundrum about payday loan companies is that they are designed to help people through what are intended to be unusual and temporary periods of financial difficulty. Long-term and repeated use of payday loans is seriously expensive.
Yet the business plans of most payday loan companies envisage growth. Their business purpose, and the purpose of their investors, is to maximise their profits – and this is bound to be at the expense of some of the poorest families and the most vulnerable places.
There lies the difficulty, and it is set out in a new report by David Boyle, called Can You Imagine an Ethical Wonga? [Download the report here]
It is published by the New Weather Institute, with help from the Joseph Rowntree Reform Trust Ltd – part of the New Banking UK project, launched by the Lib Dem peer Baroness Kramer, when she was her party’s Treasury spokesperson in the House of Lords.
The payday loan conundrum means that any alternative to payday loans must be social businesses, with the central objective of getting people out of long-term debt – and will need the means to achieve this. A short-term loan company which was designed to maximise its profits by distributing high-cost loans can never be an ethical option.
The report looks at options for achieving this, and includes the following points:
- Payday loan companies are taking heir profits from the poorest neighbourhoods, hoovering up their spending power and making them more economically dependent.
- Any regulation must be done on a real-time basis – as it is, via the online data company Veritec, in the USA – or the regulations can easily be re-interpreted or avoided.
- Regulated short-term loans could be made through the welfare system, as they were in previous generations, and repayments taken out via welfare payments.