We will have all seen the negative press around payday and short-term loans in recent years. It seems not a month goes by without some short-term loan provider being accused of not responsibly lending based on what borrowers can afford to pay back.
This has caused many people to have an overall negative view of the short-term loan industry. But is this view founded in fact, or is media hype generating an unfounded level of negativity?
Short-term loans have come under a lot of scrutiny in recent times. This is widely due to the perceived high-interest rates that are offered by these loan companies as being unreasonable and unaffordable to those who are taking out the loans.
This has led to a high number of consumer claims against payday loan providers, especially in cases where borrowers believe that the lender had not correctly checked their finances before agreeing to lend them money.
High profile guarantor lenders like Amigo have also come under scrutiny from the Financial Conduct Authority (FCA) with regards to their lending practices. This has also contributed to a wide distrust of these types of companies.
The Reality
The reality of the matter is that a small number of short-term lenders who have adopted dubious business practices have led to a wider issue of consumer distrust, regardless of an individual organisation’s actions.
Perceptively high-interest rates have been used by the media to illustrate the ‘greedy’ nature of the industry. Even though rates are typically high due to the convenient and short- term nature of the loan, compared to longer-term lending options like bank loans and credit cards that charge a lower rate of interest but over a much longer period.
The Need
Short-term loans have been created with a very specific need in mind. Allowing consumers to access funds when they have an immediate requirement.
Although short-term lenders must undertake the relevant checks to ensure that borrowers will not get into financial trouble should they take out the loan, they will also typically be willing to lend to those with a poor or limited credit history. This is a crucial lifeline for many who cannot access the usual forms of funding through traditional means.
Short-term Loan Shortages
Due to tougher regulations being set out by the FCA, many payday lenders have closed up shop in the past year. But this hasn’t meant that the demand for their services has gone down.
In fact, as a result of current economic uncertainty and key annual events like Christmas becoming increasingly expensive, there is now more demand for short-term and payday loans than ever. With this in mind, those who want to take out a short loan may find it increasingly difficult to do so.
In conclusion, short-term lenders are a crucial part of our financial system. Many individuals require short-term cash to cover unforeseen expenses. Customer trust in these businesses should only increase as regulatory bodies like the FCA put in place more guidance on what these businesses need to do to continue lending.
