Category Archives: Short Term Loans

CMA competition markets authority

Summary of the UK Payday Lending Market Investigation by the Competition Market Authority (CMA)

Just recently, the Competition Market Authority (CMA) conducted a payday lending market investigation (Click here to download the official report). Below is a summary of the findings as well as recommendations.

Overview

According to the CMA investigation, the average size of a payday loan in the UK stands at £260 and almost all loans are £1000 or less in value. The loans vary depending on repayment terms with most loans repayable in a month or less with a single instalment.

The average term of most payday loans in the UK is just over 21 days or three weeks.
In terms of growth, the UK payday loan industry grew the fastest from 2008-2012. During this period, payday loan lenders we issuing approximately 10.2 million loans per year valued at approximately £2.8 billion. Growth has been reducing since then. In 2013 for instance, payday loan industry revenues dropped by 5%. The market also contracted in 2014 with the number of new loans falling by approximately 27% between January and September 2014.

The year 2014 saw four out eleven major payday loan lenders, as well as many small lenders, stop offering payday loans. The market hasn’t recovered since following the introduction of Price Cap Regulation in January 2015 which saw many payday lenders unable to operate profitably under the new regulation.

In-depth CMA findings

The CMA payday lending market investigation reveals a lot of information on various aspects of the industry. Here’s what you need to know;

1. Payday loan usage (number of loans taken out per customer)

According to the CMA report, most payday loan customers take out many payday loans over time with the average lender taking out approximately six loans every year. In regards to borrowers’ lender preferences, most borrowers use two or more lenders.

2. Online vs high street borrowing

In regards to loan platforms, most payday loan customers today prefer taking out loans online i.e. 83% vs. 29% who take out loans on the high street. 12% of all payday loan users borrow using both channels today. On amount, borrowers borrow more online i.e. £290 compared to the high street £180.

3. Borrower loan application assessment

Most payday lenders today have developed computerised risk models that help them conduct thorough assessments on their client’s credit worthiness as well as their ability to repay the loan successfully. Borrower assessment has been and is still part of every lender’s loan application process. The sophistication of risk models, however, varies from one lender to another. In regards to loan application success, the number of loan applications turned down was above 50% for most of the major lenders back in 2012. The figure continues to rise to date as lenders become more cautious in the wake of the new FCA regulations.

4. Payday loan customer profile

The CMA investigation shows that the typical online payday loan customer in the UK has an average income of £16,500 while high street borrowers have an average income of £13,400. In general, most people who have been using (and are still using payday loans) in the UK earn less than the average income in the UK which stands at £17,500.
In regards to gender and occupation, most payday loan customers in the UK are male working in full-time jobs. They also happen to be younger (than average) and living in larger households.

Most payday loan customers also happen to have experienced financial problems in the recent past. According to the CMA investigation, 38% of all payday loan customers have a bad credit score/rating while 10% have been visited by a debt collector or bailiff. In a nutshell, 52% of payday loan customers have faced some debt problems in the near past. The number of people who repay their payday loans in full has also decreased over time.

It’s also worth noting that most payday loans are taken on Fridays at the beginning or end of the month. Most borrowers also seem to be under some financial pressure when borrowing leaving little room for assessing other suitable credit alternatives that may be available to them. In fact, less than 50% of all payday loan borrowers shop around effectively before taking out payday loans. The typical payday loan customer is also recurring. Repeat customers account for a majority of payday loan business. Most borrowers also take loans from multiple lenders mainly because of problems with existing lenders i.e. late repayment, outstanding loan/s, etc.

5. Overall Payday loan usage

In regards to overall usage, most payday loan consumers (53%) use payday loans to cater for living expenses like utility bills and groceries. 10% take payday loans to pay for vehicle/car related expenses while 7% take payday loans to pay for general shopping such as clothes and household items. Only 52% of payday loan consumers use payday loans to pay for emergency-related expenses. This is despite the fact that payday loans are actually meant for catering for emergency expenses.

Recommendations

The CMA investigation reveals some difficulties in the industry which need to be addressed. Luckily, the CMA has given recommendations for dealing with these problems. Here’s what needs to be done;

1. There is a need to boost the effectiveness of price comparison websites

Most payday loan customers don’t have the luxury of choice when taking out loans as revealed in the investigation. Since borrowers take loans under duress, better price comparison websites can help borrowers shop for loans more effectively regardless of the time constraints or other problems present when taking out loans.
Better price comparison websites will also create a perfect environment for competition which will, in turn, result in better payday loans in every regard from the pricing/fees/charges to variety. Existing price comparison websites have numerous limitations that make it impossible for payday loan customers to make accurate comparisons.

2. More transparency on late fees/overall cost of borrowing

The CMA also feels there is a need for more transparency on fees charged in the industry by different lenders. The Authority believes the FCA needs to take more action to ensure all lenders have a legal obligation to disclose all their fees/charges on previous loans clearly to allow effective cost analysis.

3. Cooperation between the FCA, payday lenders, credit reference agencies and authorised price comparison websites

The CMA also feels the FCA must cooperate with all industry players more so lenders, credit reference agencies, and price comparison websites to improve payday loan borrower abilities to search the payday loan market extensively without compromising their credit history.

4. Real-time data sharing

There is also a need for real-time data sharing according to the CMA. Such efforts will benefit both borrowers and lenders. When lenders are able to get real-time access to their clients’ credit information, they will be in a position to do better borrower assessment and in turn, avail the best possible terms.

5. Increased transparency on the role of third parties like lead generators

The CMA also feels there should be more transparency on the role played by third parties like lead generators, affiliates, brokers, etc. since most of them pose as actual lenders when that’s not the case. The CMA stresses the need for the FCA to do more to make sure borrowers know upfront if they are applying for loans directly or indirectly. This move will reduce instances of erroneous expectations since most third parties tend to overpromise or provide inaccurate information.

Summary

The UK payday loan industry is far from its peak in 2012. The number of payday lenders has reduced following the introduction of the price cap regulation by the FCA. Lenders have also become stricter today. Unscrupulous lenders may have reduced, but borrowers remain vulnerable even after the new regulation since most of them borrow under pressure. There is hardly any time to compare payday loan lenders effectively, and price comparison websites are doing very little to help. This explains why the CMA is calling for better price comparison websites among other recommendations like transparency on fees, real-time data sharing and cooperation between the regulator, lenders, credit rating agencies and price comparison websites. Third parties also need to be more transparent when promoting lenders to ensure payday loan customers make the best possible decisions when taking out loans.

Financial education is also important to reduce over reliance on short-term credit to cater for living and emergency expenses. Financial education is bound to improve the customer profile of the typical payday loan user.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.
How Has The UK Short Term Credit Market Been Revolutionised by The 2015 FCA Price Cap Regulation?

How Has The UK Short Term Credit Market Been Revolutionised by The 2015 FCA Price Cap Regulation?

Since the FCA introduced price cap regulation back in 2015, there have been changes in the short-term credit market.

The latest Social Market Foundation (SMF) report (Click here to download the official report) commissioned by the CFA (Consumer Finance Association) offers the latest assessment on the impact of price cap regulation on the short-term credit market in the UK with a special focus on cost as well as access to loans. The report contains information gathered from industry data as well as short-term credit consumers in the UK.

Considering 6.8 million UK households still live below the poverty line, a significant number of UK households rely on credit. Changing employment and work patterns as well as state benefit changes have also resulted in income instability which has, in turn, increased dependence on credit. Rising inflation and housing costs have also increased the need for short-term credit in the UK.

Let’s not forget the poor saving habits in the UK. A previous SMF research study shows that 40% of UK citizens have less than a week’s worth of income as savings. With this in mind, the health of the UK short-term credit market can’t be overlooked since most people with financial difficulties turn to short-term loans. Considering the FCA price cap regulation is the latest and most significant UK credit market event, how is the market now?

What has changed?

1. Cost of loans

According to the latest SMF report commissioned by the CFA and produced independently by the SMF, the cost of loans has fallen significantly. The latest industry data shows that the cost of loans has reduced by from 1.3% (in 2013) to 0.7% currently. In a nutshell, loans cost less now. It gets better! Loans are cheaper than the 0.8% initial cost cap set by the FCA which is an indication of healthy competition in the industry.

2. Default fees

Industry data also shows that default fees have fallen. The proportion of short-term loan on which borrowers pay additional over and above contractual interest has halved from 16% back in 2013 to 8% currently. In cases where loans are subject to default fees, the total amount of fees including interest charged after default has dropped from £45 to £24. However, concerns linger on whether the fees are still high considering they represent approximately 10% of the value of most short-term loans taken in the UK.

3. Borrower perceptions and experiences

According to the latest SMF survey, consumer perceptions have improved on affordability. Consumers are of the notion that short-term loans have become affordable. 56% of recent borrowers agree that short term loans have become more affordable. Only 43% of borrowers who took out short term loans before 2015 believed they were affordable. Although there are consumers who insist that loans haven’t become affordable, a majority of such opinions can be attributed to the fact that some borrowers assess affordability based on their own ability to service loans.

In regards to experience, most people (90%) feel short term loans are the most convenient source of short-term credit today. Some concerns have however been expressed on repayment. Approximately 20% of all recent borrowers today state that they have problems repaying short-term loans as planned or in time.

4. The size of the short-term credit market (Number of loans sold)

The latest industry data shows that the number of loans sold decreased significantly over the January 2016 to April 2016 period. The loans taken during this time were 42% lower compared to the same period in 2013. Industry experts attribute the fall to a decreasing number of lenders during this period. Many short term loan lenders exited the market between January and April 2016 after finding it extremely difficult to operate in the confines of the new price cap regulation.

5. Access to loans

The FCA had predicted that the regulation would exclude some consumers from the short term credit market more so, lower income individuals. This prediction is consistent with industry figures. The SMF report suggests that access has become restricted. An SMF survey shows that consumers are of the notion that it has become harder to obtain loans. 57% of all consumers who have taken loans before and after the regulation changes state that short term loans have become more difficult to access.

The SMF survey, however, shows that only 16% of people who have tried accessing loans before the regulation, not afterwards, have been denied loans. This is against 18% who haven’t bothered to take loans after the new regulation just because they thought they wouldn’t qualify.

Many consumers still find access to loans important for essentials or avoiding other borrowing channels such as borrowing from family members and friends. According to the SMF survey, 27% of consumers risk going without essentials if they don’t get access to short-term loans. The survey also reveals that 37% of consumers are forced to pursue other credit channels such as borrowing from family and friends if they don’t access credit despite this option being the least reliable and suitable for many.

The rest are forced to cut back on spending, misappropriate funds or rely on alternative or mainstream credit which comes at a higher cost. Some customers also resort to borrowing from unlicensed lenders when they fail to secure funding from licensed short-term credit lenders.

Summary

In a nutshell, the new regulation may have reduced the cost of loans and default fees as well as improved consumer perceptions, however, access to credit has shrunk, and the hardest hit borrowers are low-income individuals. Although the regulation stops exploitation by lenders, which was a huge problem especially in the payday loan industry, some borrowers are being forced into the hands of unlicensed lenders. This is contrary to the FCA’s previous conclusion that the new regulation would be a good thing to low-income borrowers.

The price cap appears to have reduced unscrupulous lending practices among licensed lenders, but there is an increasing number of borrowers turning to unlicensed lenders giving rise to worse problems. Unscrupulous (unlicensed) lenders don’t have to work as hard as before to attract borrowers since access to short-term credit has shrunk among the lower income borrowers. Short term credit lenders in the UK have stricter affordability assessments today which have reduced the number of loans being offered to individuals who are deemed high risk.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.
What Are The Best And Worst Ways To Use A Loan?

What Are The Best And Worst Ways To Use A Loan?

It’s always advisable to live within your budget, stay away from debt, etc.. However, there are some cases when it’s justifiable to take on debt. Sometimes it’s inevitable to take debt. When you have an emergency expense for instance (such as an unexpected medical or car repair bill), you may be forced to take a payday loan or any other type of short-term loan. It’s a bad idea to take up a loan if you don’t really need one. With that said, let’s get into more detail on the best as well as the worst ways of using a loan.

Best ways of using a loan

1. Starting a business:

It’s highly recommendable to take a loan and start a business. Business loans make the most sense because they are put into one of the most productive loan uses. Provided you prepare a solid business, it’s always a great idea to use your loan to start a business.

2. Debt consolidation:

You can also take a loan to help you manage your debt better. Managing debt can be stressing when you have many loans. Debt consolidation allows you to clear off multiple debts so that you remain with one manageable loan. If your loans have gotten out of hand, it’s a good idea to consolidate as long as you still have the capacity to service the resulting debt.

3. To build your credit score:

You can also take a loan to build your credit score. If you have a bad credit score that needs to be improved fast, taking a loan is a good idea. The benefits of having a good credit score are enormous. As long as you can repay your loan in time, there is nothing wrong with building your credit score by taking loans and repaying them in time. This tip works perfectly with credit card loans/debt.

4. To cater for emergency expenses:

As mentioned above, you can take a loan to cater for emergency expenses. Medical bills, car repair bills, roof repair bills among other kinds of bills may arise when you don’t have money. In such cases, you can take a payday loan among other types of short term loans to cater for those emergencies.

Worst ways of using a loan

Let’s turn to what you shouldn’t do with loan money. Ideally, you shouldn’t take in debt to spend on unnecessary expenses. Although the definition of ”unnecessary” expenses can vary from one person to another, here’s what you need to know.

1. Never take a loan for gambling:

Gambling is very risky. The odds are usually against you. There is nothing wrong with gambling with your own money if you really want to gamble. However, it is not advisable to get into debt because of gambling. In fact, you should avoid taking loans to engage in any activities whose outcome can’t be controlled.

2. Funding luxuries:

You should also avoid loans if you are taking them to fund luxuries i.e. buy the latest furniture, electronics, go for a holiday, buy a second home, buy new clothes/shoes. Most people get into debt because of taking loans to enjoy lifestyles they can’t afford. To avoid this mistake, fund luxuries using your own money. You can take a loan if you already have the money to fund luxuries. For instance, you may be waiting to get paid. Unless you are in such a scenario, avoid debt by all means. If you can’t afford something at any given movement, save up and get it later. You should, however, consider putting your money into better use i.e. funding income generating ventures such as a business.

3. Paying everyday bills:

It’s also a bad idea to get into debt every month to pay rent, energy bills, grocery bills, etc. You can take a payday loan once in a while to sort out expenses when you have some financial difficulties. However, it’s not a good idea to pay for everyday bills with debt. If you find yourself doing this, it’s time to adjust your lifestyle to match your income. It is possible to avoid short-term loans by living within your means and building a savings account.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.
Short Term Loan Repayment Tips to Follow 

Short Term Loan Repayment Tips to Follow 

Short term loans like payday loans can easily plunge you into financial problems if you don’t plan to repay them in a smart way. In fact, one of the main reasons why short term loans become expensive is because of missing payments or defaulting. If you want to get the best out of your short term loan, late payments and defaults should be out of the question. Below are some of the most important tips to make sure you always meet your short term loan repayment obligations. 

Tip 1: Borrow an amount you can afford to repay comfortably

This tip applies to all types of loans let alone short term loans. You should never borrow more than you can comfortably afford to repay. A general rule of thumb is making sure you aren’t repaying your loan with more than 10% of your total net monthly income. Of course, this can vary if you have other sources of income however, you should be able to comfortably service your loan alongside your other monthly expenses otherwise, you stand to plunge yourself into financial problems. If you’re taking out a payday loan, make sure you can be able to pay off the loan comfortably during your next payday or as agreed to avoid late fees and unnecessary interest charges.

Tip 2: Plan to repay your loan in the shortest time possible to save on interest charges

Short term loans are very cheap sources of short-term cash if you purpose to pay them fast. The longer the term, the higher the total cost of the loan. Most people are tempted to take the maximum term because the monthly repayments are lower. Don’t fall for this trap. Lower monthly repayments make loans very expensive in the long term. You should choose the shortest term you can afford. If possible, you can pay the loan earlier than planned. It is, however, important to look out for early repayment fees in such instances. Some short term loan lenders charge early repayment fees to discourage borrowers from paying their loans faster than agreed. You are however free to pay your loan off as fast as you like without being charged if you choose a reputable lender.

Tip 3: Pay on time

If you can’t afford to pay off your loan faster than anticipated, make your repayments on time. Apart from interest charges, lenders make a lot of money on late fees. To keep your loan affordable, you should make sure you pay off your loan on time. You can place a standing order with your bank to ensure you never miss a payment. A standing order is great if you are a forgetful person. If you took out a loan you can afford to repay comfortably, there’s no reason why you should ever miss a payment. Apart from avoiding late fees and interest charges, paying on time will also ensure you keep your credit profile intact. 

Tip 4: Make some lifestyle changes

If taking out a short term loan is financially draining even when you choose a longer repayment term, you will need to make some lifestyle changes. You can’t afford to maintain the same lifestyle if you have loan repayment problems from the onset. You have to cut down on unnecessary spending like eating out, going to the movies, weekend getaways, etc. until you pay off your loan. In most cases, you don’t have to make drastic lifestyle changes since most people incur unnecessary expenditure unknowingly. You just need to track your money more keenly ensuring you spend on necessities only until you settle your loan. 

Tip 5: Keep looking for extra income

You should also be looking for extra sources of income to pay off your loan. If you have some free time, you can find a part-time job. The idea here is to make sure you pay off your loan as fast as possible, preferably in advance. You should also use any windfall gains you get i.e. a bonus, tax refunds, etc. to repay your loan instead of spending on luxuries. Ideally, you can’t afford to spend on luxuries if you have outstanding loans so, use windfall gains wisely. Paying an extra payment will reduce your interest payment as well as give you some breathing space. 

Summary

The above tips are bound to help you repay your short term loan fast, comfortably and cheaply. It’s important to note that short term loans become expensive when you miss a payment or choose the longest term. When you borrow what you can afford to pay, pay on time or plan to repay your loan in the shortest time possible, you shouldn’t have a problem repaying your loan in full stress-free. You should also consider making some lifestyle changes and looking for extra income to boost your current income. Provided you choose a good lender, you shouldn’t be worried about being charged for repaying your loan early.

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.