Julian Knight: The real scandal isn't payday loans, it's the attitude of the banks

If high-street lenders were more flexible, hard-up people wouldn't be forced into the arms of bandits

(PETER MACDIARMID / GETTY IMAGES)

At first, second or even third glance, the rates charged by payday-loan providers are shocking.

Designed to be short-term loans to literally see people through to payday, they come with annual interest rates not in the tens or hundreds but in the thousands of per cent. In reality, the APR – although at loan-shark levels – is not as important as you'd first think as the loans are supposed to be there just for a week or two.

If, for example, you borrow £100 and a week later pay back £120, that is an interest rate that tops 1,000 per cent – but it's only 20 quid. As the government body Consumer Focus warns, however, more of these loans are being rolled over – and not in a lottery jackpot sort of way – so that a loan for a couple of weeks gets topped-up by another loan and so on. At this stage, as the loan continues to run, the fact that the lender is charging such huge interest rates really starts to matter. It's a tactic "pioneered" by the doorstep-lending firms which routinely incentivise their agents to offer fresh loans just as the old ones begin to run out.

Consumer Focus has called for payday-loan firms to be forced to point borrowers in the direction of debt advice should they need, say, five consecutive loans. Personally, I wouldn't trust these firms as far as I could throw them, and as for "debt advice", if they follow the example of some of the big banks they would push their clients only towards advisers that charge fees, or consumers could fall prey to IVA [Individual Voluntary Arrangements] providers – and then you really are swimming with a whole new bunch of sharks.

What to do then? Ban these loans? Well, no, they provide a service which many people really do need, and here's the heart of the problem – why do they need them? Partly it's rubbish pay – wages are falling behind prices in this country rapidly, and that, I believe, will get worse. Outside this, though, it's the problem of personal budgeting being a forgotten skill in this country, as well as the high-street banks simply not wanting people on lower incomes through their doors. The banks make all the right noises, but if any executive were to come up with a low-cost alternative to payday loans, or suggest that some proper flexibility should be shown over bank charges, then they would probably be led out by security with their stuff in a box. The blame for the growing payday-loan culture in this country sits ultimately with the banks and their couldn't-give-a-damn attitude.

A difficult sell

I don't know about you but almost every day it seems my retirement income is being squeezed. My personal pension statement has just arrived, and I see that the amount of cash I can expect it to pay in retirement has fallen since last year, despite the fact that I've upped my contributions by nearly 20 per cent. The reason? Annuity rates continue to fall so the forecasts for future income drop as well.

The squeeze doesn't stop there; I have two final-salary pensions, one with the BBC which will fall in value over time as annual rises are set to be below inflation. My other final-salary pension is in an even worse mess, it recently had to be taken over by the Pension Protection Fund and I expect that over time the promises made will only be, at best, partly fulfilled.

So it's difficult for me to keep banging the drum for pensions. OK, the tax relief is a boon, but you don't know if the income you're promised today will ever materialise. And all the time, pension providers and IFAs say pay more in, so it's no wonder so many people want to strike out on their own to buy property to let, or even just to live for the here and now. Also, there are the restrictions on getting your cash.

And in 2012, the Department for Work and Pensions would like to tighten those restrictions, despite the fact that the Government makes noises about desiring more flexible pensions saving. The DWP wants to bar people from transferring from a final salary pension scheme into a personal pension. Why would anyone want to do that, when final-salary schemes are by far the most lucrative of pensions? Well some are worried that their employer will go bust, and frankly don't want to trust the PPF 40 years hence (and I can certainly understand that), or they are in poor health and can get a higher income from an enhanced annuity by taking their final-salary cash pile and buying a pension elsewhere.

Yes, the number of people for whom it's sensible to transfer out will be small, but loading on another restriction is just what pensions don't need; they are already an incredibly difficult sell, even for people like me, who still think they have a place.