Simon Read: It's not just the weak that can end up in a debt spiral


Saturday 10 December 2011 01:00

Payday loans hit the headlines this week after insolvency firm R3 warned that up to 3.5 million people in Britain are expected to take out a short-term loan to tide them over in the coming six months.

My view of the loans is simple: if you need emergency cash and know you can pay it back within a few days, then paying £20-£30 for the privilege doesn't seem too bad, especially bearing mind how much the charges and interest can add up to if you go into the red at a bank.

But the problem is that few people use payday loans as emergency cash. Once started they can easily come to rely on them, meaning that interest charges mount up and they're constantly in debt.

With all the negative publicity piling up in the last few days, Wonga boss Errol Damelin has been in touch to, as he puts it, "offer some straightforward facts". It's a robust response full of various defences of his business methods but the claim that most interested me was the following: "If things go wrong we charge a one-off default fee of £20 and then stop any further interest at a maximum of 60 days."

That's the kind of responsible business practice that I would like to see. But it doesn't tally with the experience a reader told me about last year. She claimed the charges on her loan almost doubled when she failed to repay it in time.

Her case was quite complex and, at the time, I accepted Wonga's explanation of why the debt had risen. But I would like to hear from other readers who have had experiences with the firm, or other payday lenders who claim to operate fairly.

It's an issue that's important as, for many people, I believe accepting the payday loan offering can be the first step to a disastrous debt spiral, and financial worries can end up taking a terrible toll.

For those who have no experience of payday loans and who may even believe that those who get into trouble with them have only themselves to blame, I'd suggest you read a book written by Steve Perry.

Entitled When Payday Loans Go Wrong, it details Steve's descent into debt hell, which started innocently enough with a £250 loan for a weekend away. However, it ended 18 months later with the 30-year-old having 64 loans from 12 different companies worth £15,000.

You can buy it through his website

This week it has also been difficult to avoid the shocking tale of thousands of pensioners mis-sold investment bonds by advisers working for high street bank HSBC. I explore the issue of financial advice on pages 55-54 but I would like to hear your views.

The crucial question is: is it possible to trust anyone when it comes to financial advice these days? We work hard to try and ensure that our coverage of financial matters is even-handed and helpful, but we can't possibly though these pages explain all the things you need to think about when making financial decisions.

In fact I was horrified recently when a colleague at The Independent asked my advice about what kind of mortgage to take out. I explained the difference between fixed rates and variable rates, and gave an indication about the sort of deals currently available, then I told her that she should sit down with an expert who could help her work out what her best option could be.

I was staggered by her next question. "Shall I just go to my bank then?" The idea that a bank worker would offer good advice seemed so far from the present reality that I almost felt dizzy.

But the fact is, most people simply have no idea where to turn to get a few basic financial tips or guidance. So my question to you is, how did you make your financial decisions? Who did you listen to and how useful was your advice? I'd be fascinated to hear your stories.

News on Thursday that fund manager Jorma Korhonen has left Fidelity is interesting. He was charged with the almost impossible task of partly replacing legendary manager Anthony Bolton at the Global Special Situations fund.

His failure and replacement by Threadneedle's Jeremy Podger shows how high-pressured and fragile a fund manager's career can be. Sure, they get well-rewarded for their trouble, pocketing seven figure salaries in many cases. But will we see Jorma popping up anywhere else soon? It looks unlikely.

But should we have sympathy for fund managers who fail? Let's face it the whole point of their job is to provide better returns than an investor could manage to achieve through their own efforts.

On that basis rather than feeling sorry for Jorma, we should be calling for more companies to follow Fidelity's lead and get rid of underperforming managers. The truth is we pay fat fees to get the benefit of their so-called expertise. If they can't manage it, they should go.

Jorma had five years. It looks as if that was four years too long.

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