The past year has seen the demise of more leading lenders in the short-term, high-cost lending industry. After Wonga’s capital loss in October 2018, more and more lenders have followed suit, including QuickQuid, WageDay Advance, 24 7 Moneybox and other well-known lenders are expected to follow suit.
Once prolific firms in the £ 2billion payday lending industry, many have suffered from tighter regulation by the Financial Conduct Authority and the mountain of claims from former clients.
Figures show 5.4 million payday loans were issued last year, but with lenders holding 80% market share now stopping trading, where are people going for short-term loans? ?
There is an increase in demand for loans around Christmas
High cost lenders will typically see double the volume of inquiries around December. Consumers will always spend more around Christmas on things like party lunches, gifts, going out, dating, etc.
Most employees earn their salary before Christmas, there is often a gap of six to seven weeks before they receive their next paycheck at the end of January. So not only do customers spend more, but they also have to wait an additional two to three weeks before getting paid afterwards.
“The biggest lenders have left the industry, 4 million Brits need loans and no one will lend to them. We have a real problem in our hands. “
Up to 1 million Britons will seek some form of payday loan or high cost loan to cover their cash shortage during the winter period.
But a problem arises. If they can’t borrow money, they risk accumulate new arrears for credit cards and other loans – creating a spiral and making it even more difficult to access finance in the future. There is also a risk of loan sharking and black market lending that may begin to manifest.
The role of small lenders and competitors
In theory, the absence of the UK’s biggest lenders should allow smaller lenders to thrive. However, it is not that simple in practice.
Most small lenders in UK do not have access to financing for millions of loans. If the 4 million customers need a loan of £ 400 each, we are considering additional funding of £ 160 million required, for an industry which currently lacks market confidence.
Likewise, for those who receive a larger influx of clients, they potentially incur much higher costs in terms of credit checking and underwriting, which is likely out of proportion to the amount of funding they can potentially lend.
Unfortunately, these small lenders are also subject to regulatory pressure and may not even find it profitable to operate any longer.
The rise of alternatives
To fill this gap in demand and overcome the failure of the payday loan market, a real alternative is needed that takes its place.
Many well-funded start-ups are already trying to seize this space. Some are tweaking the original loan model or using the client’s employer to provide more responsible funds.
This includes Wagestream, backed by VC, which allows clients to access their salaries at any time of the month. If you can’t wait for payday and need to pay your bills right away, you can access all the money you’ve earned, any day of the month, whether it’s the 10the, 15e or 20e of the month.
Innovate in the current credit model, Finance yourself offers a real alternative that offers short term loans of 2 to 3 months with no late fees and free extensions up to 12 months if the customer needs them. This avoids the issue of revolving credit and a debt spiral, often encouraged by payday lenders.
Neyber is a financial benefits tool that enables employers to offer low cost loans and provide financial education to their staff in terms of budgeting, investing and retirement.
AT Badger loans, customers looking for short-term loans are offered products based on their credit rating, whereby people with good credit will be offered unsecured or personal loans – and poor customers will be offered options from the guarantor and secured lenders.
With secured loans, the borrower can “bridge the gap” between large purchases or sales of real estate through bridging financing and specialized financial products. Already a mature industry led by companies such as Precise, Shawbrook and MT financing, this forces individuals to own property that they can use as collateral.
Beyond Christmas, what about the future?
The future of high-cost short-term and payday loans looks very bleak, with inevitably more lenders likely to pull out within the next calendar year.
That one of the alternatives mentioned will be able to dominate the market is yet to be confirmed, but new innovations in the industry are certainly welcome.
This could mean that traditional lenders overcome regulatory pressure by offering even more flexible repayment terms and tighter affordability controls.
Likewise, it could involve start-ups working closely with machine learning and AI companies in order to offer a different type of credit score and loan product.
Otherwise we will have huge numbers of people unable to access loans and a real problem on our hands.