Huge gap in supply of short term loans

Huge gap in supply of short term loans

Daniel Tannenbaum, Co-Founder - Tudor Lodge Consultants addresses the economics behind the high cost short term lending industry and the implications of so many lenders dropping out

Huge gap in supply of short term loans

The last year has seen the demise of more high profile lenders in the high cost, short term loans industry. Following the momentous loss of Wonga in October 2018, more lenders have followed suit including QuickQuid, WageDay Advance, 24 7 Moneybox and some other well-known lenders are set to follow suit.

Once prolific companies in the £2bn payday loans industry, many have suffered the effects of tougher regulation by the Financial Conduct Authority and the mountain of compensation claims by ex-customers.

Figures show that 5.4 million payday loans were issued last year, but with lenders that hold 80% of the market share now ceasing to trade, where are people going to go for short term loans?

There is a surge of demand for loans around Christmas

High cost lenders will typically see double the volume of enquiries around December. Consumers will always spend more around Christmas for things like festive lunches, gifts, days out, socialising and so on.

With most employees earning their salary before Christmas, there is often a six- to seven-week gap before receiving their next pay cheque at the end of January. So not only are customers spending more, but also having to wait an extra two to three weeks before being paid next.

“The biggest lenders have left the industry, 4 million Britons need loans and no one will lend to them. We have a real issue on our hands.”

Up to 1 million Britons will seek some form of payday loan or high cost loan to cover their shortfall of cash during the winter period.

But a problem emerges. If they cannot borrow money, they risk going into further arrears for credit cards and other loans – creating a spiral and making it even harder to access finance in the future. There is also the risk of loan sharking and black market lending which could begin to manifest.

The role of smaller lenders and competitors

In theory, the absence of the UK’s largest lenders should pose opportunities for small lenders to thrive. However, this is not as simple in practice.

Most small-time lenders in the UK do not have access to fund millions of loans. If the 4 million customers need a £400 loan each, we are looking at £160 million pounds’ worth of extra funding required, for an industry currently lacking a lot of market confidence.

Equally, for those that are getting a larger influx of customers, they potentially incur much greater costs in terms of credit checking and underwriting, which is probably disproportionate to the amount of funding that they can feasibly lend out.

Unfortunately, those smaller lenders are also prone to regulatory pressure and may not even find it profitable to run any longer.

The rise of alternatives

To fill this gap in demand and to overcome the market failure of payday loans, there needs to be a true alternative that takes its place.

There are many well-funded start-ups already trying to capture this space. Some are tweaking the original lending model or using the customer’s employer to deliver more responsible funds.

This includes VC-backed Wagestream which gives customers access to their wages anytime of the month. If you cannot wait until payday and need to pay bills immediately, you can access any money you have earned, any day of the month, whether it is it the 10th, 15th or 20th of the month.

Innovating the current loans model, Fund Ourselves offers a true alternative which offers short term loans of 2 to 3 months, with no late fees and free extensions of up to 12 months if the customer needs it. This avoids the issue of revolving credit and a spiral of debt, often encouraged by payday lenders.

Neyber is an employee benefit financial tool that allows employers to offer low cost loans and provide financial education to their staff in terms of budgeting, investments and pensions.

At Badger Loans, customers looking for short term loans are offered products depending on their credit score, whereby individuals with good credit will be offered unsecured or personal loans – and poor credit customers will be presented with options from guarantor and secured lenders.

In secured lending, borrower can ‘bridge the gap’ between large purchases or sales of property through bridging finance and specialist financial products. Already a mature industry lead by companies such as Precise, Shawbrook and MT Finance, this requires individuals to have a property that they can use as collateral.

Beyond Christmas, what about the future?

The future of high cost short term and payday lending looks very bleak, with inevitably more lenders likely to exit in the next calendar year.

Whether any of the alternatives mentioned will be able to gain market dominance is yet to be confirmed, but new innovations in the industry are certainly welcomed.

This could involve traditional lenders overcoming regulatory pressure by offering even more flexible repayment terms and stricter affordability checks.

Equally, it could involve start-ups working closely with machine learning and AI companies in order offer a different type of credit scoring and loan product altogether.

Otherwise, we will have a huge number of individuals unable to access loans and a real problem on our hands.

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