The once-booming payday loans industry has taken a dramatic turn as two of the most successful lenders in the UK have confirmed this month that they will no longer be accepting new loans.
The industry has historically thrived with the input of Israeli entrepreneurs and investors – but a huge change in regulation by the Financial Conduct Authority and increase in compensation claims has seen a very recent decline in the once-thriving sector. With this in mind, there is scope for new alternative loan products to emerge and capture market share.
Longer Term Finance
Under the direction of the FCA, existing payday lenders are moving away from the traditional 14 and 30-day product to more payday loans alternatives. This reflects on more long term finance products from around 3 to 24 months – which gives the customer more flexibility and breathing space to repay their loan.
This moves away from the traditional payday product which can quickly result in a customer borrowing repeatedly month-after-month. It also gives the customer the option to repay their loan early if they have the means to do so and this will typically result in a cheaper loan since less daily interest has accrued.
For those customers with bad credit histories, they are limited to accessing mainstream finance from typical banks and lenders. With less payday loans being funded, they may look to guarantor products in order to obtain the finance they need.
A guarantor loan product works by having an extra person you know with a good credit rating to co-sign your loan agreement and repay your loan if you cannot. This provides the lender with extra security knowing that a person with a good credit history (and ideally a homeowner status) is able to back up the loan and reduce the risk of defaulting.
The individual rarely relies on the guarantor to repay their loan for them, but having the extra person is considered a very safe and low-risk way to apply for money. The most competitive lenders in the UK include Trust Two, George Banco and Amigo Loans who offer rates from 49.9% APR.
There has been an emergence of online credit alternatives, such as online credit cards, top ups and overdrafts.
Using the example of an online credit facility, this works in a different way to your traditional loan. You have access to up to £500 over a period of 3 months and you only get charged interest on the amount that you use.
The idea is that you do not over borrow and can save money by constantly repaying early, giving you the option to top up as you please.
Whilst credit unions have been around for over 70 years, their use is becoming more mainstream. As non-profit organisations, customers can borrow a few hundred pounds at far more affordable rates of around 26% representative APR.
To be eligible for a credit union, you must fulfill a certain criterion such as living within the local community, being a member of a local group or working in the public sector such as a nurse, teacher or street worker.
The downside of credit unions is that they are not as savvy as high street lenders or banks, taking up to a week for funds to be transferred. However, rates of interest are extremely low and there are no late fees if you cannot keep up with repayments.