RESHAPING OF SHORT TERM LENDING BUSINESS IN UK

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RESHAPING OF SHORT TERM LENDING BUSINESS IN UK
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We are seeing a see change in the way short term
lending business is conducted in UK. This has
been due to the persistent actions of FCA which
has made sure that the short term lending
industry is a positive and valuable force within
the society. On 2nd January, 2015 new regulations
regarding the payday industry came into effect.
They have put a ceiling on the interest, default
charges and maximum repayable amount for payday
loans.
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These regulations have changed the landscape for
the short term lending business. Before these
regulations most of the payday industry market
share was cornered by five to six players.
Lenders like Wonga charged astronomical interest
rates of 5,853 with no limit to the maximum
repayable amount. This led to several borrowers
getting burdened with thousands of pounds of debt
when they had borrowed 100 or 200. Many
influential sections of the civil society came
out in open opposition to the payday lending.
These payday lenders became the poster boys for
all the things which were wrong with the society
after the financial recession.
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With the election year coming up it was
inevitable that the government would be forced to
take strong measures to rein in this industry.
One of the characteristics of this industry
before the regulations was low competition on
interest rates. In the other sectors of credit
lending system this is the primary competing
point and borrowers pay special attention to it.
However within the payday industry the borrowers
overlooked this factor as the initial principal
loan was small. This allowed industry leaders to
corner up to a third of the total market even
though their interest was the highest. They did
this by massive marketing campaigns with a
recurrent theme which championed the ease of
processing loans through them.
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The high interest rates and default charges gave
them huge profit margins and allowed ever greater
increase in their marketing and sales campaigns.
The result was that Wonga climbed from zero to a
million customers in less than seven years.
However the short term lending business has
changed completely, as signified by Wongas
chairman, Andy Haste. He commented about the new
price caps that Wonga would be a smaller and
less profitable business. This is true for
almost all the remaining payday lenders. Many
have even closed their shops knowing that they
cannot work with lower margins.
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The positive results of these price caps will be
felt by genuine borrowers. The industry has been
forced to relook at their affordability checks
and now would make sure that the default rate for
their loans is at a minimum. Even the borrowers
have realized that the payday loans might not be
the best alternative for their short term
financial needs. It would be much more advisable
to take loans for 3-6 months which can be repaid
flexibly and would require smaller repayments
every month. There are several firms in the
market, like True Blue Loans, which not only give
the borrowers adequate advice but provide them
with the option to repay in 3 to 9 months.
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Every financial adviser worth his or her salt
would know that it is not possible to repay any
loan within a short period of time. This is truer
for borrowers who are running on tight budgets. A
longer term loan by companies like True Blue
Loans would provide the necessary breathing space
to realign the expenses with income. Hence a
borrower should be able to choose ideal repayment
schedule and repay the debt at a rate which would
suit their budget. On the other hand the payday
loans require repayment of loans in a single
installment which means that a majority of
borrowers have to make a cut in their basic
living expenses like utility or food in order to
repay the loan.
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As the lenders scrutinize each application more
closely and reject a higher proportion of
applicants we can be sure that the borrowers will
also become more discerning. Instead of looking
at the ease of borrowing they would now go for a
lender which best fulfills their needs and gives
them the requisite flexibility of repayment. A
similar opinion was voiced byRussell
Hamblin-Boone, Chief executive of CFA (Consumer
Finance Association who said The commercial
reality is that the days of the single-payment
loan are largely over - payday loans are being
replaced by higher value loans over extended
periods.
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Migration to this sort of lending and borrowing
might take a bit of time but eventually the
market is destined to move towards longer
duration loans. The firms who have been in this
type of lending should get first movers advantage
and the overall benefit of having past
experience. In the meantime easy cash processing
theme by Wonga and other players might be
eliminated. The first example of this was the
removal of grandparent puppets by Wonga. These
puppets made the entire transaction look trivial
and attracted the young and impressionable
borrowers. This also led to a lot of borrowing
for superfluous expenses which eventually take a
huge toll on the financial health of any
individual or household.
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The borrowers should be thankful that by laying
these regulations FCA has shown a positive and
agile attitude towards dealing with payday loans.
It also ensured that this problem was tackled
head on before it became too big and lead to any
loss of the taxpayers money. The heydays of
payday lending are definitely past us and we
should see a new beginning of prudent and
responsible lending from short term lending
businesses.
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For more information visit us
www.bfwggrants.org.uk
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Thank You