Why are students using payday loans?

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There appears to be a rising trend that shows that more and more students are taking out short term loans.  Research by the National Union of Students (NUS) shows that up to 46,000 undergraduates are using what they term high risk debt (which includes payday loans, cheque cashing and doorstep loans).  They suggest a number of reasons for this which relate, in the main, to funding their living costs and fees. .

Some highlights from their research show:

• the weekly cost of student accommodation has nearly doubled in 10 years (£60 – £118);
• 50% of students worry about meeting basic living expenses like rent and utility bills;
• over third of students receive no family financial support.

These stats show it is not a typical student lifestyle being funded via a payday loan, but the essentials.

So worried are the NUS about the risk of spiralling debt problems in the student , that they are calling on a ban of all payday lenders from advertising in student magazines, student residences and on campuses.

Payday loan giant Wonga took the unprecedented step of not advertising to students last year and removed all pages from their website in 2012 that could have been construed as targeting students. This has not, however, currently stopped other companies trying to.

Students themselves, has also taken a novel approach and launched their own “payday loan” company specifically for the student market. Unlike normal lenders they have a number of interesting features:

• no rollovers;
• a 10 day grace period – in case of student loan problems;
• a fixed cap of interest – you can never owe more than 50% of what you borrowed;
• a lower rate of interest.

So even the students themselves see that there is a need for access to short term finance, and they feel they are able to offer a more competitive and student friendly service themselves.

What does the industry say?

The Consumer Finance Association, which represents some of the main payday providers, said students would need to be in regular employment to qualify for a loan from a reputable lender, and that simply banning advertising in campuses would not remove the issue.

The new financial watchdog, the Financial Conduct Authority (FCA), has issued new regulations for payday lenders which came into force in July and include:

• restrictions on the number of rollovers (ie.how many times a loan can be extended);
• wealth warnings on ads;
• more rigorous testing on affordability.

The aim is to remove the less than reputable loan providers from lending.

Other options for help

Students are being advised to think carefully before logging on and applying for a payday loan.  There are a number of alternatives students could look at first.

Some universities have access to learning funds where students can apply for funds if they are struggling to pay for their studies.

Other finance products such as an 0% credit card or 0% student overdraft may help cash strapped students in the short term and means they are not actually having to pay back interest on the borrowing.

Credit Unions are another source of low cost small term finance loans – more information is available here: http://www.findyourcreditunion.co.uk/home.

The Bank of Mum and Dad could be an option before turning to a payday loan for students. Or, those that live close enough can lean on them in other ways to help reduce their living costs.  Asking for a loan or moving back home to keep debt down is not a bad idea.

Summary

As you can see there are a number of reasons why students are turning to payday loans and why it is a worrying trend in some people’s eyes.  That said, payday finance is not the only option available to students who need a short term injection of cash.

About the author: Emily Green is a freelance personal finance writer living in Hong Kong. She loves travelling and is planning to relocate to New Zealand within the year.