Short Term Loans 

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Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%

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Author: Internal Marketing Department

 

In the past the short term loans market has received a lot of criticism for the way in which it operated and the treatment its customers received. As the sector grew the attention it received from the media and governing bodies alike made it evident lenders were pushing the limits in terms of its practices and equally providing minimum effort to ensure customer service was a major consideration of its overall operation. This realisation has certainly helped pave the way for a more consumer friendly product but also ensured the lenders which remain are able to be successful due to their continued commitments to getting it right. To understand the improvements it is fast best to look back at how far the market has come.

When short term loans first became available they offered something consumers had not had access to before. Whereas in the past a consumer would need to discuss loans of any size with their bank or main stream lender, these loans were available pretty much at a click of a button. In order to be approved typically the customer would complete a relatively short application form online and receive a quick decision from the lender. The product too was simple to understand and offered a clear repayment structure. The classic style short term loans asked for a lump sum repayment to be made on the due date of the loan. An applicant could request an amount from £100.00 up to £500.00 typically and when the agreed repayment date arrived this amount plus interest was to be repaid. Often these early loans would apply interest specific to the amount borrowed rather than the time taken which proved expensive. This meant whether a loan was for 15 days or 30 the amount was the same. This way of working was often based on the fact the whole product was designed around the concept of repaying on the customer employment pay date; not therefore considering the time the loan has been in operation. A costly feature for those applying close to their individual pay date.

The whole principle of a lump sum repayment although suitable for some, for most, proved simply unaffordable and meant many consumers borrowed from one lender to satisfy another, creating a cycle of debt. This expense was further compounded by lenders when an alternative repayment option was introduced, these were known as extensions. An extension meant the customer could simply repay the interest applicable on the loan when their due date arrived and then delay the lump sum repayment until their subsequent pay date. Although again a singular extension may not have been costly, many consumers found themselves continuing to extend over a large time frame and ending up stuck when the lump sum repayment was still unaffordable. Another costly feature for the user of such loans.

To seal the deal these lenders were also known to be unhelpful and showed no sympathy to those customers who were in genuine financial hardship and who had tried through extensions and reduced offers, to keep their heads above water. It is therefore no surprise that changes were enforced and those lenders of short term loans who were unwilling to adapt are no longer in existence.

Now things are different, instead of lump sum repayment loans the market is offering a more flexible and consumer friendly loans which are better checked for affordability of repayment. Instead of asking a customer to make one large repayment, an instalment loans lender will offer a range of repayment terms, typically from 3 months up to 12 months. This allows the applicant to make a selective decision as to how best to repay the loan. There are also new practices being brought in by lenders to ensure they are lending responsibly. These checks are mainly focused around assessing affordability. Often an instalment loans application will now ask the customer to supply all information relating to their monthly expenditure which allows the lender to decide clearly if the applicant has the means to make the repayments as set out in the loan agreement. This combined with better analysis of the customer credit worthiness and previous repayment history helps to ensure a true picture of the customers current financial circumstances. It would therefore be fair to say that the short term loans market is gaining back some of the positives it was originally recognised as having, which in time, will hopefully ensure the market is able to remain a useful one for the consumers who turn to it.

Editor: Some examples and comparisons used in this article refer to practises used before FCA regulations were introduced and would not be permissible in today's market. They are used to give a 'before and after' comparison. 

Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%

By Gemma Lane