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Understanding the Short Term Loan Market in the UK

It’s interesting to conduct analysis of how payday loans compare with one another. For starters, payday loans are unsecured lines of credit that are typically issued for less than 12 months. According to a CMA Report ,the typical size of loans from payday lenders was £260, and the majority of these loans were less than £1,000. Clients can typically repay these types of loans in single instalments, or over several months, with an average payback period of 3 weeks.

Consider that between 2008 – 2012, the revenue from loans issued by payday lenders  amounted to £1.1 billion. During that period, some 10.2 million ‘easy loans’ were offered to clients, and the total amounted to £2.8 billion. However, the growth of the payday loans market slowed significantly from 2013 onwards and a contraction occurred in 2014. As a case in point, between January 2014 and September 2014, payday lenders issued some 27% fewer loans, and many operators simply dropped out of the market after that point. The reason for the sharp contraction in these types of loans was FCA regulation.

The FCA is the Financial Conduct Authority, and it is a consumer watchdog organisation. Its purpose is to prevent extortionary tactics from being used against borrowers, by capping the interest rates that can be charged on loans. The short-term loans market in the United Kingdom is peppered with many operators today. The convenience of applying for easy loans online makes this highly attractive to borrowers across the board. These loans are unsecured loans, meaning that physical property or additional surety is not required in the application process.

However, lenders pay careful attention to a customer’s ability to repay the loan. Online lenders typically check a borrower’s employment status and run a credit check on the individual. In 2012 for example, there was a 50% denial rate of short-term loan applications from major UK lenders. Since then however, there have been further decreases in the approval rate from the UK’s major lenders.

Who Typically Applies for Payday Loans in the UK?

The median income of clients applying for payday loans was found to be £16,500, marginally less than the UK average of £17,500. High Street borrowers had median incomes of £13,400. In terms of gender differences, males borrow more than females, and they tend to come from larger households. Of those borrowers, 38% had poor credit ratings, 35% were in arrears with their creditors, 11% had court judgments against them, and 10% had been visited by debt collectors or bailiffs. Of the respondents in various surveys, 53% used their short-term loans for living expenses, 10% used it for vehicle-related expenses, and 7% used it for shopping purposes.

The UK stats are in line with universal trends in the short-term loans market. It’s encouraging to note that in 2012, 6.4/10 of these loans were repaid in full either on time or before they were due. Most customers are confident of their ability to repay their loans in full, however some 17% of customers experienced difficulties repaying their loans. Another interesting statistic with payday loans is that of repeat borrowing activity. Most payday loans customers tend to apply for additional loans. According to the stats, some 80% of new loans originated from previous customers. Over the course of a year, the average customer took out 3.6 loans from their preferred lender and 4 of every 10 customers had established a relationship with their preferred lender.

Fair Loan Regulations Benefit Customers

Another interesting statistic is that of rollovers. This indicates how a loan is rolled over into a new loan by extending the duration of the loan with the current lender. Data indicates that 20% of borrowers rolled their loans over in 2012. 26% of High Street loans were rolled over, and 16% of online loans rolled over. However, after 2012, this practice diminished rapidly as a result of FCA regulations. Greater accountability is now part and parcel of the short-term loans process. Today, lenders typically purchase data from CRAs (credit reference agencies) to determine an applicant’s risk profile. Various pricing structures and models are used to prevent lenders from unfairly treating their clients. The easy loans market is certainly more customer friendly than ever before.

 

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