The cost of unaffordable lending
Alan Campbell, founder of Debt Hacker and campaigner against high cost credit, calls for a shift in how we think about and tackle problem debt by explaining to borrowers about unaffordable lending.
There are 8.3 million people in the UK struggling with over-indebtedness. 8.3 million people for whom the anxiety of struggling to meet their bills and credit commitments is a daily burden.
Debt comes at a heavy price.
We know about the poverty premium: that those who can least afford it pay the most for their essential goods and services, and for finance.
But the cost of unaffordable debt is more than just financial; there’s a health premium to be paid too.
Unaffordable debt creates psychological distress, stemming from stigma, shame and anxiety. This psychological distress then leads to further financial disorder creating a vicious circle, and exerting an ever-increasing toll on the borrower’s wellbeing.
For those with unaffordable debt, alcohol consumption increases as people use it as a coping mechanism to deal with the stress; isolation increases, as people feel embarrassed at not being able to manage better and try to hide it from loved ones; sleep quality deteriorates as stress and anxiety keep people awake at night; and people’s diet suffers, as they can’t afford to shop healthily, or worse, skip meals and resort to food banks because they can’t afford to shop at all.
It shouldn’t be that way.
Many of those that are struggling with over-indebtedness are victims of unaffordable lending - that is, having been granted loans where affordability checks have never been properly carried out by the lender, and this is particularly prevalent among the payday loan industry. Payday lenders have been getting away with exploiting those with a poor credit history for years, selling loans with eye-watering interest rates without carrying out the proper affordability checks, dragging people into an increasing spiral of debt that’s difficult to break out of.
These companies profit because they know that most borrowers take the repayment of a loan very seriously and will struggle to repay even if that means missing other bill payments or going without.
Most people have been encouraged to think that if you struggle but eventually manage to repay a loan, then that loan was affordable.
The truth is that if you struggle to repay a loan then that loan was, by definition, unaffordable. There is a conspiracy of silence surrounding unaffordable loans and the rights of victims and this has to change.
I was shocked to read the recent comments by the CEO of Quick Loans calling for the return of debtors’ prisons for those who have been driven past the point of being able to repay by the unethical actions of lenders. It is the lenders’ statutory responsibility to ensure that they only ever lend affordably, and these perverse comments are simply a continuation of a victim shaming where the abuser blames the victim, stigmatising the very people he’s profiteering from.
It doesn’t need to be this way, and helping borrowers understand their rights is a fundamental step in righting this wrong.
We know from research that most people use high cost credit due to what the Treasury select committee recently described as a “financial life shock”, such as bereavement, serious illness or loss of a job. In other words, a financial emergency.
In those circumstances, where the borrower is desperate for cash at any cost, then it is right and proper for the lender to exercise their obligation to ensure any loan is affordable. In continuing to flout regulations and lend unaffordably, lenders are simply ignoring their responsibility and relying on the borrower’s not understanding or exercising their rights.
People who have been victims of unaffordable lending are entitled to make a complaint against their lender. If that complaint is upheld – and the financial ombudsman’s data shows that over two thirds of complaints against payday lenders are upheld – the lender must return all of the interest and all of the charges on all of the unaffordable loans they sold.
Furthermore, borrowers will also have those toxic loans removed from their credit file, improving their chances of securing better credit options in the future.
I set up Debt Hacker as a free, easy-to-use website to explain to borrowers their rights and give them an online tool to exercise those rights.
There is no downside for a borrower making a complaint, quite the opposite, there’s a considerable upside. This is an empowering exercise as borrowers understand that they were not at fault, and start to regain control of their finances by taking action to get the recourse to which they are entitled.
People are recovering hundreds and even thousands of pounds.
Once lenders start to bear the cost for their unaffordable lending it will change lending behaviour or the lenders will go the way of Wonga: bust!