Consumer for life Understanding Payday Loans An education pack for tutors and teachers

Transcription

1 Consumer for life Understanding Payday Loans An education pack for tutors and teachers

2 This publication is available in the following formats on request: Braille CD/Audio format Large Print Contact: The Education Section The Consumer Council Elizabeth House 6 Holywood Road Belfast BT4 NY Tele: Contents How to use this pack Exercise One Exercise Two Exercise Three 4 Exercise Four 8 Exercise Five Tele/Textphone: Fax: Websites: info@consumercouncil.org.uk complaints@consumercouncil.org.uk is intended to provide general guidance only and should not be regarded as a complete or authoritative interpretation of the law. The advice given is of a background nature and may not apply in all individual circumstances. Every effort has been made to ensure that the information is correct at the time of printing. March 0

3 How to use this pack Exercise One aims to raise awareness among learners about the pros and cons of high interest and short term borrowing. It includes five exercises, support materials and answers to assist learners. This pack will help learners to understand: The pros and cons of taking out a payday loan; Their spending habits and impulse buys; How to plan ahead for unexpected bills; and How to add up the costs of roll over interest. This pack is designed for frontline staff including literacy and numeracy tutors to deliver training in the community and voluntary sectors. You do not have to be a financial literacy tutor or consumer rights expert to deliver this training. Tutors should decide if support materials need to be adapted before giving information out to learners. 4 Choose between using the exercises with individuals, in pairs, small groups or as part of a whole group discussion. This resource can be photocopied. 5 Use the Consumer Council s Home Budget Planner, Understanding your Credit Report and Thinking about Borrowing Money? resources to help learners plan their budget and make their money go further. These can be downloaded at 6 Contact Consumerline on or visit for expert consumer help. 7 Tutors should not give specific financial or welfare advice. Tutors should refer learners to any of the following organisations: advice4debtni Advice NI Citizens Advice Consumer Credit Counselling Service Tutor Instructions Learners are asked to answer questions about the pros and cons of borrowing money from a payday lender. Exercises will last for approximately 0 minutes each. Preparation To prepare for this lesson, cut out payday loan advertisements from newspapers, magazines and online and bring these along to class. You will need a computer, access to the internet, a data projector, pens and paper for this exercise. Download a copy of the Consumer Council s Thinking about Borrowing Money? leaflet at Introduce the subject of payday borrowing to the learners. Use the support materials on pages 6-8, the Consumer Council s Thinking about Borrowing Money? leaflet and the payday loan advertisements to help you.. Give out a copy of the exercise called Introduction to Payday Borrowing. Prepare learners to participate in a group discussion.. Give out a copy of the exercise called Pros and Cons of Payday Loans. Go through the instructions with the learners. Prepare learners to participate in a group discussion. Play the video clips. 4. Work through the questions in both exercises. Provide learners with the opportunities to share their own life experiences. 5. Suggested answers to both exercises are on pages 9-0. Provide feedback when both exercises are completed.

4 Exercise One Exercise One Introduction to payday borrowing This exercise will help you understand what the pros and cons are in taking out a payday loan. Discuss these questions in your group. Pros and cons of payday loans This exercise will help you understand what the pros and cons are in taking out a payday loan. Watch the video clips and discuss your views in a group. Answer the questions in the exercise. Have you heard about payday loans before? If so, where? Where have you seen the advertisements? (. mins clip) (4.05 mins clip) (.7 mins clip) Who do you think payday lenders customers are? Why do you think people might want to borrow money from a payday lender? 4 Do you know anyone who has used payday loans? If so, what did they think? List the pros in borrowing from a payday lender. 5 Have a look at the Consumer Council s Thinking about Borrowing Money? leaflet. Discuss the pros and cons of borrowing money from a credit union, catalogues, store cards, credit cards, using a bank overdraft or taking out a personal loan. List the cons in borrowing from a payday lender. 4 5

5 Support Materials for Exercise One and Two Payday Loans and How They Work What are payday loans? Do you need money fast? Don t have enough money to last you until your next payday? You might see payday loans advertisements like these and if you are short of money until your next payday you might be tempted to apply for one. Payday or paycheque loans are short-term loans that you get in return for your pay cheque or proof of your income. They are basically cash advances on the wages you are expecting and are available online and on the high street. How much are the loans for? Loans are usually for a few hundred pounds and they have to be repaid on a certain date which is normally the borrower s next payday. Loans can be in place for days. To arrange a payday loan, people either authorise a direct debit from their bank account, which will be deducted when they get paid, or post date a cheque which the payday lender cashes on the loan due date. What are the risks? Payday loans should only be considered if consumers are confident that they ll be able to repay the debt in full when it s due. It is important to be aware of the high interest charged and the risks of falling behind with repayments. Support Materials for Exercise One Payday loans and interest charges Payday loans are not suitable for people who want to repay their loans over a longer period, as they are designed as shortterm loans to deal with emergency and cash flow problems. APR charged by payday lenders can be over,000%. Also if you fall behind with your repayments and roll over the interest until the next pay cycle it can work out to be very expensive. What does APR mean? APR stands for Annual Percentage Rate of charge. It is a standard way of showing the costs of borrowing to help you compare deals. The APR includes any interest and non-interest charges, and is calculated on an annual basis - even if interest is applied daily or monthly. If there are no non-interest charges, the APR will usually be the same as the annual interest rate shown in the credit agreement. Generally, the lower the APR the cheaper the deal for you, so if you are thinking of borrowing, shop around. What does roll over mean? Roll over means to extend an outstanding loan by only paying off the interest. Interest will be added for the extended period and there may also be additional fees or charges. Also, if you cannot even pay the initial interest, you may be charged default fees. People that can help with money worries Some people are very worried about their money situation. The Samaritans offer confidential, non-judgemental support to anyone feeling unhappy, anxious or stressed. Contact or 6 7

6 Support Materials for Exercise One Answers for Exercise One Planning Ahead Introduction to payday borrowing Before you take a loan there are some things you need to be sure about. If you got an unexpected bill, could you afford to pay back the loan amount and interest? What if you can t make the payment - will there be additional fees or charges? What would happen if you rolled the interest over to the next month? Have a look at the table below to help you decide. How much interest will it cost if you borrow 00 from a payday lender?* Assume the monthly interest charge is 5 per 00 loan and there are no additional fees If paid off in Total interest Total amount payable month 5 5 months months months Variable answers. Variable answers. People may have seen advertisements online as pop-ups, advertised on the back of buses, at sporting events, on TV or in magazines. Variable answer. Reasons could be to get money quickly. People might find it difficult to borrow money from other sources because of a poor credit rating or because of money problems. People who use payday loans might be parents with young children, people on low wages or young people who might need money to pay an emergency bill. Variable answer. Some learners may know people who have used a payday loan while others may have viewed news items or online clips of people who use payday loans. Answers are within Thinking about Borrowing Money? leaflet. There may also be roll over fees or charges. Also, if you can t even pay the initial interest, you may be charged default fees. *The terms used in these examples are for illustration purposes only but are typical of those you might pay. 8 9

7 Answers for Exercise One Exercise Two Pros and cons of payday loans Variable answer. Reasons could be to manage cash flow problems or deal with emergencies, to keep out of long term debt or to pay for non emergencies such as a holiday. Tutor Instructions T Learners are asked to participate in a quiz about their spending habits and impulse buys. This exercise will take about 5 minutes to complete. Variable answer. People who operate payday loans believe they provide a good service to consumers. They believe they provide a valuable part of the market for people who do not have access to other credit, for example, because they have a poor credit history, Court Judgements or have been declared bankrupt. Variable answer. People can get further into debt using payday loans. The speed of the process may mean that consumers don t properly consider whether they need and can afford the credit, and may not compare this with other possible credit options discussed in the Thinking about Borrowing Money? leaflet. People s circumstances can change, for example, an emergency might happen and they may find it more difficult to pay the money back in the set time. Payday loans are heavily advertised. People may not be aware of the problems and consequences and these may not be adequately explained to them by payday lenders. The interest rates, administration and roll over fees can be very high and difficult to pay back.. Give out a copy of the exercise and go through the instructions with the learners.. Support materials for this exercise are on page 6.. Work through the questions and provide learners with the opportunities to share their own life experiences. 4. Answers will vary and are not included. 5. Provide learners with feedback when the exercise is completed. 6. As a follow on exercise, why not use the Consumer Council s Home Budget Planner? This can be downloaded at Learner Instructions This exercise will help you understand more about your spending habits and impulse buys. L. Answer the questions and then discuss your views in a group.. Check your answers with the tutor when you have finished the exercise. 0

8 Exercise Two Suggested Answers to Exercise Two Think about how much money you spent over the last few months. Do you have areas of weakness? Try to identify them.. Impulse buys might include clothes, music, cds, dvds and itunes.. Variable answers. Answer yes or no to the quiz questions below.. Impulse buys might happen after payday as this is when people have the most money. Some people might allow themselves one or two treats but set and stick to a budget for the month or week ahead. A. Did you spend any money that was set aside for serious demands, for example rent? B. Did unexpected bills turn up that you didn t budget for? C. Did you have spending urges in any clothes shops? D. Do you impulse buy to give yourself a mood boost? E. Did your car insurance, electricity, phone, gas/ oil bills arrive at the same time and cause you headaches? F. Do you ever get caught short before payday? Do you buy on impulse or are you a careful spender? YES YES YES YES YES YES NO NO NO NO NO NO 4. Some ideas to keep track of spending include: Having a budget and sticking to it; Making a shopping list and sticking to this before going shopping; Prioritising areas of need, for example, rent, car servicing and food as opposed to wants like clothes and cds; Using online banking to keep a track of how much money you have left or check at the cash point; Checking receipts carefully to ensure that you have not been overcharged; Using a phone app (application) to keep control over spending and to track daily spending; Shopping around to get the best value; Saving some money each month for emergencies; Reading bank statements to find out how much is spent on bank charges; Keeping all receipts for a week to track spending habits; and Regularly checking bank statements to make sure they are accurate and correct. 4 What are your ideas on how to keep track of your spending?

9 Exercise Three Exercise Three Tutor Instructions T Four out of five people get unexpected bills. Emergencies such as the car, boiler or washing machine breaking down can leave people under pressure if they don t have the money to cover these bills. Learners are asked to complete a money planner to cover the costs of emergencies and events at different times of the year. This exercise will take 0 minutes to complete. 4 out of 5 of us get unexpected bills each year. The chances are you will too, so plan ahead! Lenders advertise a lot around certain times of the year such as Christmas to tempt you to spend money that you may not have! What times of the year are you more likely to run out of money?. Give out a copy of the exercise and go through the instructions with the learners.. Each learner s budget will vary and answers are not included.. Provide feedback when the exercise is completed. 4. Give out a copy of the learning review on page 7. Help learners to set goals. 5. Reinforce the importance of planning ahead and setting aside money for emergencies and events. 6. Ask learners what they have learned about themselves. Learner Instructions L This exercise will help you to plan your money better. It may help you plan for the emergencies and events over the year. How will you plan your money for events and unexpected bills? Use the plan below to help you. Your Money Plan Cost Events and Emergencies Car breakdown Repairs / equipment breakdown Gas and electricity bills. Read through the list of events and emergencies.. In the money plan column, write down how you would cover these bills.. In the cost column estimate how much money this will cost. 4. Fill out the learning review and set goals for the future. 5. Use the learning review to set some money goals for the future. Holidays School uniform time 4 5

10 Exercise Three continued Exercise Three continued Learning Review 4 out of 5 of us get unexpected bills each year. Chances are you will too, so plan ahead! Lenders advertise a lot around certain times of the year such as Christmas to tempt you to spend money that you may not have! What have you learned about yourself? What times of the year are you more likely to run out of money? One thing I still want to find out about payday loans. How will you plan your money for events and unexpected bills? Use the plan below to help you Your Money Plan Cost Events and Emergencies One thing I might do differently now or change in the future. Sports events Nights out on the town Christmas 4 What are your money plans? Start saving? Pay off a loan? Pay off credit or store card debts? Pay off overdraft? Get advice about money worries from advice4debtni, Advice NI or Citizens Advice? Family celebrations Birthday presents 6 7

11 Exercise Four Exercise Four Tutor Instructions Learners are asked to participate in a team exercise called Payday Lending Quiz. This exercise takes around 5 minutes to complete.. Divide the group into teams.. Give out a copy of the exercise and go through the instructions with the teams.. Ask the learners to appoint someone in their team to write down the answers. 4. Explain that the team who gets the most answers correct wins. 5. Correct answers and provide feedback when the exercise is completed. 6. Answers are on page 0. Learner Instructions This exercise will help you understand more about your rights before you take out a payday loan. T L. In your team, answer the quiz questions. Write down yes or no beside questions one to seven. In a couple of sentences write down the answer for question eight.. The team who gets the most answers right wins.. Appoint someone in your team to write down the answers. 4. Check your answers with the tutor when you have finished the exercise. Payday Lending Quiz Team Name: Write down yes or no beside questions one to seven. In a couple of sentences, write down the answer for question eight.. To qualify for a payday loan, you must be 8.. Must a creditor use a credit reference agency to make a credit worthiness check?. Legally, all payday lenders must be licensed by the Office of Fair Trading. 4. If a creditor makes a loan without checking on the debtor s credit worthiness does that make the loan unlawful? 5. There is no legal limit to the amount or rate of interest payday lenders can charge in the UK. 6. If you think that a credit provider has acted unlawfully or in a misleading way, you can complain to the Financial Ombudsman. 7. All lenders must tell you what their APR is before you sign an agreement - except for overdraft fees. 8. Bonus question When must a creditor check the credit worthiness of a debtor? 8 9

12 Answers to Exercise Four Exercise Five Payday Lending Quiz. Yes. No, but they should satisfy themselves that you can afford the credit. They must also explain to you the risks if you can t.. Yes 4. No, but they may be at risk of licensing action by the Office of Fair Trading and you can ask the Financial Ombudsman (see below) whether you might be entitled to some form of redress. 5. Yes 6. Yes. If you feel that a payday lender has acted unreasonably you should complain to them first to give them a chance to put things right. If you are still unhappy with how they have dealt with your complaint you can contact the Financial Ombudsman Service, South Quay Plaza, 8 Marsh Wall, London, E4 9SR Tele: Website: 7. Yes. This doesn t necessarily have to be included in an advertisement, but it must be stated in the pre-contract credit information form which they must give you, and also the credit agreement itself. 8. This must be done before the payday lender gives you a loan and also before the payday lender rolls over the loan or increases the amount of credit. Payday lenders should also satisfy themselves that you can afford the repayments. Tutor Instructions Learners are asked to work out the cost of payday loan roll over interest and provide budgeting tips to two friends called Jim and Sally. This exercise will take around one hour to complete.. Give out a copy of the exercise and go through the instructions with the learners.. Discuss the support materials. Support materials can also be used for answers which are on pages Work through the questions and provide learners with the opportunities to share their own life experiences. 4. Correct answers and provide feedback when the exercise is completed. 5. Encourage your learners to find out more on how to avoid recurring payments for payday loans at the Money Advice Service article.aspx?a=0004_recurring_payments 6. As a follow on exercise, tutors may download copies of the Consumer Council s Thinking about Borrowing Money? guide at Learner Instructions This exercise will help you understand the costs of high interest credit. T L. Answer the questions in the exercise.. Check your answers with the tutor when you have finished the exercise. 0

13 Exercise Five Exercise Five continued Your friend Jim wants to borrow some money. He wants to see how much the interest would be if he rolls over the loan. He asks for your help with home budgeting. Sally wants to get a payday loan online for 00. She wants to see how much the interest would be if she rolls over the loan. She wants your help with home budgeting. How much interest will it cost if you borrow 00? Payday Lender Assume the monthly interest charge is 75 per 00 loan and there are no additional fees. If you repay in Total interest Total amount payable month months months months 00 5 months 6 months 7 months 8 months 9 months 0 months months months How much interest will it cost if you borrow 00? Payday Lender Assume the monthly interest charge is 5 per 00 loan and there are no additional fees. If you repay in Total interest Total amount payable month 5 5 months months months 00 5 months 6 months 7 months 8 months 9 months 0 months months months Questions. Fill in the table above. Work out: The roll over interest for months 5 to. What you will pay for months 4 to.. At which month does the total amount you will pay reach: Twice the original amount borrowed? Three times the original amount borrowed? Four times the original amount borrowed? Questions. Fill in the table above. Work out: The roll over interest for months 5 to. What you will pay for months 4 to.. At which month does the total amount you will pay reach: Twice the original amount borrowed? Three times the original amount borrowed? Four times the original amount borrowed?

14 Exercise Five continued. Jim and Sally have asked for your budgeting tips. What tips would you give to help them manage their money? Support Materials and Suggested Answers to Exercise Five Will you have enough money in your bank account to cover the loan on the due date and your living expenses? What if your income goes down or you have unexpected bills to pay? Have you worked out the roll over charges? You will have to pay roll over interest charges if you can t afford to pay the money back. Also check if there are any additional fees. How much interest will it cost if you borrow 00? 4. What other borrowing alternatives do you think Jim and Sally might think about before borrowing? Payday Lender Assume the monthly interest charge is 75 per 00 loan and there are no additional fees. If you repay in Total interest Total amount payable month months months months What should Jim and Sally do if they have trouble paying their electricity bills? If you borrow money will it make your debt situation worse? What could happen if you can t afford the repayments? If you borrow money will it make your cash flow problems worse? Is the loan for a real emergency? Could you wait or use savings instead? Have you read the payday loan terms and conditions to find out what the late payment fees are? Payday lenders often charge around 0. Were you given details of the loan to take away? Did the lender explain how it would operate and what could happen if things go wrong? Was it made clear that you could change your mind and cancel the loan if you wanted? Based on any previous experience of borrowing, can you really commit to paying back the loan? 4 5

15 Support Materials and Suggested Answers to Exercise Five What are your alternatives? If you are considering using a payday loan, you should look into all the available alternatives first. Apply for a Crisis Loan (0% interest) as you do not have to be in receipt of a benefit. Contact your local Social Security office for information and advice. You may be able to get an interest-free loan if all of the following apply: You are aged 6 or over; In an emergency or as a result of a disaster, you do not have enough money to meet the immediate needs of you and your family; or There is no way to prevent serious damage or serious risk to the health or safety of you or your family. Support Materials and Suggested Answers to Exercise Five If you have no other alternatives to a payday loan make sure: 4 You fully understand the costs and charges involved as rates higher than,000% APR are common. You do not borrow more than you can repay or for longer than necessary. If you miss a repayment, the cost of borrowing a small amount can get very high, very quickly. The lender is licensed by the Office of Fair Trading. You can check the register here at You don t sign a payday lending agreement until you have considered all options for borrowing. 4 Speak to your bank manager as you may be able to get an agreed overdraft. Ask them if they can offer a deal on rates and conditions. Think about the following before you borrow: How and when are you going to repay the money? What are your reasons for borrowing the money? How long will you need to borrow the money? What are the total overdraft costs? Remember, there can be set-up fees as well as other fees and interest. Many banks offer an arranged overdraft as part of a current account package but not in basic bank accounts. Check if your local credit union can help. Irish League of Credit Unions Ulster Federation of Credit Unions Never ever borrow money from an illegal money lender/loan shark. 5 6 You understand how the loan works and what could happen if things go wrong. You get written information and a copy of the contract you have signed up to. If you are having trouble paying your gas or electricity bills you should contact your supplier. They can help you arrange a repayment plan that you can afford or offer you a more suitable payment method. If your supplier won t help you, you can contact the Consumer Council on or by at complaints@consumercouncil.org.uk for assistance and advice. Did you know that gas and electricity suppliers have arrangements in place to allow you to switch even if you are in debt? Ask your supplier to tell you about the options available to you. Use the Consumer Council s electricity and gas price and service comparison tool to see where you can save money on your bills at 6 7

16 Answers to Exercise Five Answers to Exercise Five Jim Sally How much interest will it cost if you borrow 00? Payday Lender Assume the monthly interest charge is 75 per 00 loan and there are no additional fees. If you repay in Total interest Total amount payable month months months months months months months months months months months 85 5 months How much interest will it cost if you borrow 00? Payday Lender Assume the monthly interest charge is 5 per 00 loan and there are no additional fees. If you repay in Total interest Total amount payable month 5 5 months months months months months months months months months months months At which month does the total amount you will pay reach: Twice the original amount borrowed? Month 4 Three times the original amount borrowed? Month 8 Four times the original amount borrowed? Month Remember! There may also be roll over fees or charges. Also, if you can t even pay the initial interest, you may be charged default fees.. At which month does the total amount you will pay reach: Twice the original amount borrowed? Month 4 Three times the original amount borrowed? Month 8 Four times the original amount borrowed? Month. See support materials on pages 5-7 for answers to questions three, four and five. Remember! There may also be roll over fees or charges. Also, if you can t even pay the initial interest, you may be charged default fees. 8 9

17 The Consumer Council Elizabeth House 6 Holywood Road Belfast BT4 NY Complaints line: Tele/Textphone: Fax: Websites: info@consumercouncil.org.uk complaints@consumercouncil.org.uk Consumer Council Northern Ireland ConsumerCouncil