Are Pay-day Lenders Guilty? Or Victims Of Their Own Success?

Reece Warren insists that the demonisation of pay-day loan companies hides some uncomfortable truths

In the wake of Ed Miliband’s announcement that he would, as Prime Minister, aim to levy higher taxes on pay-day lenders, we have to ask two questions: firstly, if this plan is justified, and secondly, if it isn’t, what would be the best way to deal with them?

Miliband’s intentions are unquestionably noble – almost Robin Hood-esque. But, unfortunately, in practice he’s simply got it all wrong. I commend Miliband’s ballsy attempt to take on an undoubted problem for society, and his even more noble intention of funding Credit Unions who offer these loans with much lower interest rates: however there remain at least three crucial flaws in these plans.

Firstly, is he right to attack an industry for its undeniable success merely in fulfilling a clear market demand? Although this market is made up of people in often desperate circumstances, it doesn’t change the industry’s core success (the same as every business) in satisfying peoples’ wants in order to gain a profit. Although this industry does it much more ‘overtly’ – to put it mildly – does this justify a higher tax for this industry?

Miliband has accused these companies of destroying communities. There was an example of a young student at the University of East London who borrowed £400 and had to pay back £1000 – but the relevant pay-day loan company didn’t “destroy the community” – it just highlighted the lack of brains that this individual must have had to not grasp the concept of interest rates. Arguably, every business profits from customer lack of knowledge in one way or another, so why is Miliband’s tax-policy specifically for this industry justified?

Secondly: on what planet does taxing a successful company in order to help a smaller competitor compete make sense? Unless that planet is either (a) socialist or (b) communist, then this simply doesn’t add up. Isn’t this similar to taxing a hypothetical Barclays (as it has a high profit margin and high interest rates) in order to fund a smaller competitor in the shape of the Yorkshire Banking Group? Once again it comes down to the idea of taxing a company/industry simply for being successful – may I remind all of you that this is a capitalist society where companies in the same market compete rather than fund one another.

My final problem with Miliband’s proposal is one of my absolute hatreds in this world – tax being issued as a punishment.  Another way of writing ‘tax as punishment’ is ‘theft’: because punishing an industry for being successful in its field is, without doubt, covert stealing. I have absolute abhorrence with tax being used as a punishment, as that’s not what it’s supposed to be – it’s supposed to be a form of contribution in order to support those in financial hardship, resources such as education, and, importantly, giving back to the community. Nowadays it seems tax is being thrown around so much as a punishment for business that the definition should literally be changed to ‘a form of theft from people who have been/are successful’.

It absolutely baffles me that politicians’ answer to everything is “Tax!” Binge drinking on the rise? TAX IT. Smoking on the rise? TAX IT. Fat people still fat? TAX CHOCOLATE. The list is almost never-ending and it’s something that intensely infuriates me – tax shouldn’t be about punishing people, but about helping them. This tax increase on the pay-day loan industry: will it help the majority of people? No! Why? Because the moment you raise taxes for an industry is the moment that industry raises its interest rates or potentially sack its employees – who does that help? Credit Unions. Who doesn’t it help? Everyone else.

So what’s my solution to this matter? In a nutshell, it revolves around one simple but underestimated concept: education. If people really are unable to grasp concepts like the ‘pay-day sliders’ used by companies such as Wonga, then arguably they are to some extent complicit in their own misfortune. Yes, the only type of justified inequality within society is the inequality of work-ethic and intelligence, but if people are genuinely unable to realise what they have to pay back, then surely they cannot entirely escape some degree of responsibility for their predicament.

In a not-so-aggressive way though, for me, two things must happen to tackle the issue. Firstly, more financial-oriented education to people currently incapable of assessing the risks/repayments (which I feel are quite well done with the Wonga ‘sliders’): and secondly, a raising of the profile of Credit Unions. Pay-day loan-sharks are definitely an issue, but only due to people’s lack of more common-sense, and a lack of alternatives – both these issues would be tackled sufficiently with my two suggestions.

In response to a criticism that Credit Unions don’t have much money and can only lend to x amount of people, my response would be that, the more people that use them means the more funds available to them. You’ll also find that, if Credit Unions become a nationwide-known industry, then natural progression will lead to one of two outcomes: either (a) a lowering of interest rates by the current industry in order to compete with this new potential threat, or (b) Credit Unions will end up raising interest rates once a greed for profit takes over, which inevitably occurs throughout the world of business in 99% of cases.

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