Kerry was 35, working in local government and running a cake-making business as a side hustle when she started taking out payday loans. She had just broken up with her boyfriend, who she had been supporting financially, and her lifestyle changed when she was newly single: “I was going out more and therefore spending more. I was saving on no longer helping my ex but I was spending on nights out with my friends – drinks, food, taxis – it became a cycle.”
At first, she borrowed just £200 and paid £50 in interest. In the next month she took out £300 and paid it back plus £75 interest, and so it continued; her biggest loan was £500, which she paid back over six months. “It was a stressful time,” she reflects, “but I remember that relief when you get a loan accepted and the money transferred, it was like an addiction.”
Kerry says she made a good wage as well as earning extra money from her business, but she was busy and not really paying attention to her spending. At the end of every month, she found that she didn’t have enough money. She also realises, looking back, that money became linked to how she was feeling. “I’m in a far better place mentally and with a new partner, so all in all I’m happy, which I think makes a massive difference to your whole outlook, including your attitude to money. I no longer go through life spending without thinking.”
A third of those who use payday loans in the UK are aged 25 to 24, according to data from the Financial Conduct Authority.
Naomi has a similar tale of falling into debt. She was in her 20s and working as an HR officer when she borrowed £6,500 in payday loans over a two-year period, a sum she says she finds shocking to see added up and written down. “I initially took out the loan to do exactly what they are meant for, to see me through to payday,” she explains. “But then I borrowed more the following month as things got tight again and it turned into a cycle of borrowing every month. As I go into such a hole with money, I even used a payday loan to buy food and a few presents one Christmas.”
“I totally regret taking out the loans,” Naomi says. “It’s horrible to think how many thousands of pounds I paid in interest. While a payday loan sounds like an easy way out, it only relieves the panic for a short time. I then found dread sets in all over again the next month when I was short of money again.”
Part of the problem, she believes, was that it was so easy to borrow without really questioning it. Often, these loans are only a few clicks away.
“I used an app to make an application, which made the process painless and although I felt embarrassed and ashamed to be getting the loan, I didn’t need to talk about it to anyone, which I suppose made me more inclined to do it.”
Think of your typical payday loan customer and young professional women earning above average salaries and enjoying artisan cocktails at the weekends do not spring to mind. Yet contrary to popular belief, debt is not a problem confined to those on minimum wages.
Growing pressure on young people’s finances, particularly those of young women, from housing and the cost of living to being bombarded with easy ways to spend and borrow with the swipe of a thumb on our phones, means how much we borrow is increasing, but it is still a taboo issue that we feel too embarrassed to acknowledge or solve. And it is driving poor decisions about how to manage our money and get out of debt.
A payday loan is the kind that offers you a relatively small sum of money – usually a few hundred pounds – to tide you over until your salary comes in, or so the marketing goes. In return you pay sky-high interest rates. In theory these do not add up to a huge sum because you repay the loan within a few days, but many people, like Kerry and Naomi, are over-optimistic about their financial situation and find themselves unable to pay the loan back as quickly as they’d imagined, at which point interest fees start to pile up.
A third of those who use payday loans in the UK are aged 25 to 34, according to data from the Financial Conduct Authority released earlier this year, while the debt charity StepChange says its customers are getting younger and younger. The average customer aged 25 to 39 owes £12,911, and the average customer under 25 owes £6,277.
Many of those people are earning what you would consider decent salaries. More than a quarter of the people the charity helps make between £20,000 and £30,000, with a significant proportion on salaries of £40,000 or more.
The loan company FairQuid says NHS staff make up the majority of payday loan applications, borrowing a collective £45 million a year. The most frequently cited reasons to borrow are unexpected expenses, bills that need paying or special occasions that need financing.
There is also an increasing trend in borrowing by young self-employed workers who are finding it difficult to get paid on time. ETZ Payments, which creates software to help businesses process time sheets, surveyed 2,000 freelancers and found that 15% have had to turn to payday lenders as a result of inconsistent payments.
New tech-based solutions are also being proposed in an attempt to tide people over, but aren’t they just more ways to make us come financially unstuck?
Debt charity StepChange says its customers are getting younger and younger. The average customer aged 25 to 39 owes £12,911, and the average customer under 25 owes £6,277.
For example buy-now-pay-later schemes, in particular, are proliferating. A survey by Hastee Pay, itself a tech solution offering people the ability to access their future earnings early, found that unsurprisingly, the majority of millennial workers say buy-now-pay-later encourages them to spend more and spend money they are never going to have.
Unusually, those earning over £100,000 a year were more likely to say they are negatively influenced by buy-now-pay-later schemes. It supports the notion, says James Herbert, chief executive of Hastee Pay, that “financial wellbeing is not an issued faced exclusively by low earners, it is a cash flow concern that is felt by workers across the board.”
It seems that for some of us, the more we have, the more we are inclined to spend and as long as that’s the case, there will always be organisations willing to lend us money.
In 2019, Monzo launched its first short-term loan to offer more affordable payday loans. Current account customers who are feeling short on cash can apply through the app, at a click of a button, to borrow between £200 and £15,000. Smaller loans will be charged with a maximum interest rate of 24% APR, while the larger loans, from £7,500 upwards, will cost from 3.7% APR.
With traditional payday loan companies charging as much as 1,000% APR, the Monzo offering is comparatively good value. Unlike most banks, it also lets you pay your loan back early, or late, without penalty.
If you are borrowing money, however, you need to go into it with your eyes open and understand what’s in the small print.
For example, APR, which stands for Annual Percentage Rate, is the interest rate you are frequently quoted when looking to take out a loan, but it is not necessarily the interest you will pay. In fact, legally, only 51% of those who apply for a loan have to receive the APR; many will face much higher borrowing costs.
It’s also important to do some maths and understand the difference between loans that charge interest in percentages, and others that charge fees. Many lenders and banks make it deliberately difficult to compare. This is particularly the case with overdrafts, many of which work out more expensive than payday loans because people sit in them for so long.
Some banks will outright reject someone for a mortgage if they have taken out a payday loan in the past six years.
You should also consider your credit rating. How much you can borrow and at what rate is dependent on how a lender scores you, but how much you borrow will also have a negative impact on your credit rating and make it harder to take out things like a mobile phone deal or a mortgage in the future. Those who do not repay some of the buy-now-pay-later loans out there time, for example, will have it recorded on their credit report.
Some banks will outright reject someone for a mortgage if they have taken out a payday loan in the past six years.
The cheapest way to borrow money is on a 0% purchase credit card. You will need to have a reasonable credit rating to apply for one, but you can then borrow a sum from a few hundred to several thousand pounds without having to pay any interest at all, usually for one or two years. Only do this if you know you will be able to repay during that period though, or you will be clobbered with high interest rates once the 0% period ends.
Naomi, who with her husband now runs the Skint Dad website to help people budget better, is now debt free – as a result, she says, of finally accepting and talking about the fact that she was struggling.
“I think mismanaging money can come from the fear of being judged by others,” she says. “This has pushed people to spend more when they’re not always in a position to pay it back.
“I used to have a real fear of being judged about money. It’s something I never really wanted to talk about openly as I was ashamed. The more I’d have to talk about it, the worse I’d feel that I didn’t have enough cash to get by or pay off debts.”
In the end the only way she could escape from her payday loan spiral was to ask the company for some reprieve and approach the debt charity StepChange, who will help you put a debt management plan in place for free.
Once the plan was in place Naomi knew what she had to do, and it felt liberating. She suggests you keep a spending diary, strip back any unnecessary costs and work out a realistic budget, as well as start saving a tiny amount, even if it’s just £10 a month.
“I only wish I did this sooner,” she says. “I felt that I was a failure. I compared my situation to others and wondered what I’d done so wrong to not have the same money and opportunities to do things as they had, whether that be buying a house or having trips away. I now realise that everyone’s situation is different and it’s just the hand we’re dealt, but that doesn’t mean we can’t change it. It’s only when I opened up about money and my debt issues that things really did start to get better.”
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