Category Archives: Short Term Loans

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.