The days of formal bank meetings filled with nervous pleading and the laying out of our entire financial history may feel like they are only just behind us, but the changing face of the personal loans market is one that has changed finance for the better.
Gone are the days of physical income verification and proven history with your chosen bank – nowadays, we can switch on our computers or open the browser on our phones and apply for personal loans in just a few moments. You could even compare personal loans now if you were in need of the cash. The opportunities are seemingly endless, but it hasn’t always been that way.
Personal loans have come on quite the journey to become the unsecured but safe lending practice we see today, through days of pawnbroking and unregulated payday loan lenders, to FCA legislation and technological advancements. We’re taking a look at the changing face of personal loans in the UK.
In The Beginning
While the concept of borrowing money has been around for as long as the finance industry can remember, it was pawnbrokers that really built up the idea of lending as we know it. In the US, the idea of borrowing money to tide over until payday was nothing unheard of – in fact, for centuries American workers would be able to request an advance that had a form not too dissimilar to the payday loans we know today, which they would pay back when their weekly wages came in. The UK, however, lacked an infrastructure similar to this and relied on another form of borrowing.
Pawnbrokers were the UK’s answer to a short-term loan, in which workers would give up something of value in return for a cash sum that they could return come payday in order to essentially buy back their collateral. Generally, families would pawn jewellery, tools, furniture or anything else of significant enough value to warrant providing the money.
The Rise Of Payday Loans
Payday loans as we recognise them didn’t come to the UK until around 1992 when The Money Shop set up on the British high street. Despite being an American company, they introduced the concept of a short term, unsecured loan that would enable people to get the cash they needed without risking their assets. To people in the UK, it completely changed the loans market and by 2006, there was £330 million being borrowed in that year alone. By 2009, 1.2 billion a year was being borrowed by 1.2 billion people across 4.1 million loans.
The pressures of the credit crunch were enough to send workers and employees of all incomes and social classes to payday loan lenders, simply because they made lending far more accessible than traditional banks. As more and more companies became available to borrow from, consumers were bypassing their local banks, who were becoming notorious for saying ‘no’, and headed to lenders who promised anonymity and subtly of borrowing, with far less fuss when it came to testing their income and credit-worthiness.
The accessibility of the internet at the time also made payday loans the obvious choice. When things were getting tough financially, people could log onto their computers, enter their details and have money in their account in a matter of days rather than weeks. It made things convenient and lenders took full advantage – there were over 240 companies and 2,000 high street stores offering short-term loans during the credit crunch.
The Fall Of Payday Loans
As we all know, payday loans didn’t remain in the finance industry’s good books for long. While they did offer short-term financial relief for those in times of trouble, it still remained unregulated and there was an increasing number of cases where consumers were being either taken advantage of or were simply wading out of their depth before too long. At the time of the sudden rise, the Office of Fair Trading was in control of the markets and it was quickly clear that they couldn’t handle the size of the market.
There were a growing number of reports of the system being abused by lenders, who appeared to be enabling consumers to fall into deeper and deeper financial trouble. They could roll over payments from month to month, allowing interest to grow against extortionate rates to the point where a loan that had originally been within the hundreds grow to be in the thousands, with repayments becoming completely unmanageable. These reports ultimately tainted the industry, creating an air of distrust around the idea of payday loans.
To make matters worse, it was quickly reported that not only were borrowers falling into trouble financially, but some of the more well-known companies were also exercising negative practices to push people into either taking out the loan or threatening them if repayments weren’t met. These dubious business practices could include anything from constant calls from the company itself to threatening letters from law firms that were proven not to exist.
A campaign was introduced by a number of members of parliament, alongside debt organisations, charities, and even the Archbishop of Canterbury. This campaign pushed the UK’s government to protect borrowers from these adverse practices, with a core aim to reform the market as a whole. With 10-12million payday loans still being taken out, the pressure was on.
How Payday Regulation Improved The Whole Industry
Regulation came at the hands of the Financial Conduct Authority (FCA) when the government determined that they would be a better fit for regulation than OFT. Through an in-depth analysis of the market including a number of consultations with other financial bodies, they began to implement regulation and legislation that would protect consumers and improve practices across the board.
Within the FCA’s actions, there were two different types of guidelines – regulations that had to be followed, and recommendations that lenders could implement to improve the industry as a whole. Set out in the Consumer Credit Sourcebook, the first roll-out of new legislation in April 2014 included:
- Restrictions on how many times a lender could roll over payment. This could now only be done twice.
- Companies could only collect CPAs in full. They could not remove part payments from the borrower’s account.
- Companies could only collect CPAs once, rather than as many times as they wanted.
- Companies could only try and collect a payment unsuccessfully twice.
- APR had to be advertised clearly, and risk warnings had to be listed on all communications.
The following year, further changes were implemented, though this time they focused on placing caps on rates that lenders could charge. This was designed to protect borrowers from taking on more than they could handle, and that their loan had less chance of running out of control. The caps include:
- Fees and interest rates were capped at 0.8% per day
- There would be a total cap of 100%, so borrowers wouldn’t pay back more than what was borrowed.
- Default charges had to be happed at £15.
Recent changes have also meant that all online lenders are required to advertise their loans on comparison websites. This had to be done at least once. It’s thought that this change was implemented in order to encourage borrowers to do their research, keeping the market competitive to ensure that lenders wouldn’t take advantage.
For lenders of both payday and personal loans, the FCA’s regulations have changed the way they need to operate and while this led to a reduction of 38% of payday loan companies back in 2014, the changes are now common practice. Seeing that a lender is FCA authorised gives consumers the peace of mind and can encourage them to take that final step to apply for the loan they’re searching for.
The industry as a whole became far more concerned with safe borrowing than ever before, with even debt advisory services more widely available at an earlier stage than previous years. With stricter criteria in place for applicants, those who are unlikely to be able to repay their loans won’t be accepted with applying. This is to not only eliminate the risk but is designed to protect borrowers from falling into further financial trouble than they have already seen.
The Effect Of Credit Scores On Lending
When it comes to borrowing in today’s financial landscape, most of the decisions you’ll face when borrowing will rely on your credit score. Your credit report holds up to six years of your financial history, meaning that a lender can check how creditworthy you are. The higher your score, the more trustworthy with your finances you are deemed. It’s important to note, however, that most lenders won’t actually look at the score directly – they’ll do their own analysis using the information on your report beyond the numeric value.
More and more lenders are also taking their checks a step further, conducting an affordability assessment beyond just your history. They’ll take a look at your current financial situation, including your income, employment status and money on hand, in order to determine whether you can afford to keep repaying the loan in the future. For this reason, a poor or limited credit history won’t necessarily guarantee you a refusal.
It’s important to ensure that you’re taking steps to improve your credit score, however. While you could be accepted for a personal or payday loan, a good credit report is necessary for taking out mortgages, applying for credit cards, getting the best utility rates, taking out a contract on a mobile phone and, of course, getting the best car and home insurance rates. In some cases, a bad credit score might prevent you from being able to apply for any of the above and so working on improving the score is vital.
You can improve your credit score by:
- Register To Vote – If you aren’t on the electoral roll, it can be much more difficult for you to be accepted for credit. Credit Reference Agencies utilise your electoral roll report to compile your credit history, so ensuring you take the time to register can make all the difference when it comes to being accepted or improving your score.
- Are You Linked To Someone Else? – Whether it’s a joint bank account, a joint loan or any form of joint financial product, being linked to someone with a poor credit score can pull yours down with it. If the person you are liked to financially has a bad credit score, you should unlink yourself as soon as possible.
- Be Careful With Applications – Every time you apply for any kind of credit or finance, the lender in question will request and search your credit report. Every search leaves a mark on your report and if there are too many at any one time, this can have an adverse effect on your overall credit score. For this reason, make sure you use free comparison services, rather than applying to a number of lenders individually.
- Check Your Details – If any of your accounts have incorrect details, such as your address, this could be having an effect on your score. You should take the time to go through your accounts and make sure that everything is up to date and correct.
- No Credit History? Take Out A Credit Card – If you have a very limited credit history or even no credit history at all, this can make it extremely difficult to get accepted for a loan. For that reason, taking out a credit card can help you build up your report and score. By taking out small, affordable amounts and repaying them as soon as you can, you can start building up your score and over time, you’ll be able to apply for bigger, longer-term financial solutions such as loans, finance and more.
From payday loans to the personal loans we see around today, the UK’s approach to lending has changed over the past few decades. From the rapid growth of the payday loans market to the newfound regulation that has made personal loans a safer, more competitive and ultimately more pleasant solution, the changing face of the market is one that was very much needed.