PAYDAY LOANS: RECENT MEDIA COVERAGE

Lots of stuff about payday loans in the media just recently. I’ve mentioned on my Twitter feed that the subject was featured in “Broadcasting House”, one of my very favourite programmes on BBC Radio 4, yesterday morning.

I thought that in several ways the programme presented a balanced view. Rather than simply saying “these loans are terrible and should be banned because of their outrageously high interest rates”, at least one interviewee said that the amount paid (and it’s generally small, as it’s generally on smallish loans) could well be less than what the bank would charge you for going into (unauthorized) overdraft.

A fair point and another reason why people would be tempted. I’d previously said in my last post (at the back end of last week) that these kinds of loans could be considered in emergency, provided you also put a plan in place which ensures that you repaid the loan at the next payday .

High interest charge … or a bank charge? Maybe both

However, there is a comprehensive article on this by Matthew Wall in ‘Moneywise’ magazine (November 2010). The article points out something else, which adds a further danger to what’s already known about these kinds of loans.

He says: “Lenders usually take your debit card details as part of the application process so they can take out the full repayment come payday. They’ll do this whether you have the money in your account or not, potentially pushing you into overdraft and triggering bank charges if you don’t.

In this situation it’s a double whammy; you’ve paid the payday loan company’s interest rate (which is well known to be very high) but then you are stung with the bank change anyway.

Matthew Wall goes on:

If you can’t repay the full amount you can ask to defer the loan, but they’ll usually insist you at least pay the borrowing charges.

There may also be a deferral fee or a charge incurred for arranging the new loan. So it’s not hard to see how cash-strapped borrowers can quickly become submerged in debt.”

Want to know more?

1. To see the whole of Matthew Wall’s article, go to: http://www.moneywise.co.uk/cards-loans/personal-loans/article/2010/11/03/beware-offers-easy-credit

2. My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886

PAYMENT PROTECTION INSURANCE - RECENT MEDIA COVERAGE

In my last post I announced a new website dedicated to my eBook, "Back to the Black: how to become debt-free and stay that way".

You’ll find the site at http://www.back-to-the-black.com/

In the book I refer more than once to Payment Protection Insurance (PPI), about which I had a healthy scepticism based on personal experience. Ten years ago, my IFA persuaded me to take out PPI; after several hefty premiums, I discovered that, being self-employed, I would not have been able to claim from the policy.

I complained of mis-selling, the policy was cancelled, I was promised a refund of premiums paid. I can’t recall ever getting that refund.

That was then. More recently, following lots of adverse media coverage, the whole PPI area was said to have been tightened up. Therefore, and in the interests of balance, I asked a practitioner who knows the subject to give me a current overview of the product. This he did and I included his comments in full within my book. Here’s what he said:

My view of PPI is:

Very good product, where appropriate. Especially in these tough times.

BUT

1. Ensure product is specific to your circumstances - self employed / agency work / contract work etc.

2. What is non-pay period - some policies don’t payout for first 3 months!

3. ONLY go for monthly based policy, not single premium - unless it is at wholesale cost, with no commission attached.

4. Check what you have to provide to claim - sign on/ monthly certificates / doctors notes etc etc

5. Check how long payment lasts.

It is a valuable product on credit cards, as the charge is only based on the amount outstanding, so during good times and if you clear your card, it costs nothing.

Valuable on a mortgage, but again do research, don’t just take the mortgage provider’s contract. Search around.

The sale of PPI has changed significantly over the past year or so, as many past products are now being claimed against as mis-sold, so providers are more cautious in 'stitching up' the client.

As always, look at the small print and take notes, and send written confirmation of your understanding to the provider of any conversation you have had.

But is the matter resolved? This month’s edition of the magazine “Moneywise” has an article entitled: “The 10 financial products to ditch now”. (the front cover and the web version were even more forthright: “10 rip-off financial products.”) Here is the piece:

PPI, which promises to cover the repayment on a debt if you lose your job or are unable to work due to illness or accident, appears to be a prudent way to protect yourself from huge debts.

But, unfortunately, the banks' hard sell of PPI meant that thousands of people ended up with a totally worthless product. "They were selling PPI to the self-employed," says Peter Staddon (see below), "although they would never have been able to claim for unemployment."

However, don't let this put you off all plans. "Some policies are good. Look for those sold through brokers as they can arrange cover that suits your needs," he adds.

Alternatively, consider income protection insurance, which can pay until you retire, and is often more comprehensive.

SAVING: The figures vary but, according to which? PPI could add an additional £2,000 to £3,000 to a £7,500 five-year loan

USELESSNESS RATING: There are better protection products available

* Peter Staddon, by the way, is the head of technical services at the British Insurance Brokers’ Association. His view should therefore be taken seriously.

PPI can provide valuable protection but beware, especially if you are self-employed.

Finally: the same issue of Moneywise confirmed that new customers with Lloyds Banking Group will not be “ripped off by the sale of PPI (their wording, not mine) alongside loans, mortgages and credit cards after the bank announced it would stop pushing the product. Lloyds is the first of the banks to take this step”. A most welcome step.