Responsible lending is a concept that has the finance industry buzzing and it is something that the Financial Conduct Authority (FCA), the regulator for finance in the UK, has based regulations about payday loans on. One of the latest innovations in responsible lending has been highlighting the image of the short-term borrowing industry as one that focuses on lending responsibly to people who can afford to borrow from payday loan lenders.
The ways that responsible lending responds to the challenges in the consumer finance industry
One of the biggest challenges for consumer finance companies is showing the benefits of responsible lending. The FCA announced an initial cost cap of 0.8% per day of interest based on the amount that was borrowed. With guidance from the regulator, lenders can show consumers that their products can help them based on their situation such as if they are working full-time and need a short-term borrowing solution.
Another challenge some payday lenders face was repeat customers who could not afford the loans, but took out several loans at different lenders. Lenders who are responsible are always looking to serve customers who can afford to repay. To help consumers borrow money properly, lenders create useful tools such as repayment calculators on their websites. These work by showing consumers that before they make the decision to get a loan, they can use free tools to see if they can afford the repayments. It’s easier to visualise whether a loan is right for you based on how much you will be repaying which is why many lenders have repayment calculators on their website now.
Is it better to apply for a short-term loan than to ask family & friends?
Financial situations come in all shapes and sizes. Each situation is unique depending on your circumstances. One trend that has swept UK society and finances is the increase in the cost of housing. The UK is now a nation of renters, not buyers. According to StepChange, the debt charity, more than 70% of people who contacted them are say they are renters, not owners of their home. People who are renting come up with different challenges compared to those who are not renting – paying the rent on time to avoid being evicted. Other things that can affect paying rent on time such as being paid late by an employer. This is just one of many reasons why some people approach friends or family for loans. The benefits of friends and family are obvious – they are friendly faces who know you. They also have an emotional attachment to you which can make short-term borrowing from them something that you can consider instantly.
The hidden fact is that money can often destroy even the closest friendships and relationships especially if it is not paid back on time. This is why short-term lending has boomed in post-austerity Britain. As long as you choose a responsible lender and you have a stable lifestyle, a responsible lender is a better choice to get you out of a financial bind because it keeps your financial affairs personal and secret, and it helps you maintain your personal relationships. The short-term loan is an option that gives consumers some control over their finances instead of succumbing to the stress of not having access to cash.
Are responsible lenders a helping hand or should banks be the only option for credit?
The banking system skews in favour of commercial lending – this is why you tend to see adverts for business loans and corporate loans that you read about in the papers. Banks are options if you are starting a business but the finance industry has changed a lot in the past 10 years. The rise of consumer finance has changed how people deal with their finances. Before you would apply to access cash, today you search for the right finance deal for you depending on your lifestyle. Consumer finance has made borrowers at the heart of their money. Responsible lenders who lend small amounts of money such as £100 or £700 can be the bridge that you need between not having money and waiting until you get paid.
If banks are the only options for credit, this doesn’t allow for diversity in the market and it doesn’t allow for all types of consumers to be served. Consumer finance companies such as payday loan companies make it easier for different types of consumers to be serviced.
New trends show the power of repayment plans
The rise of multiple repayments increases lenders’ standards because consumers are given more options as opposed to a set schedule from the lender. If you are in a situation where you need to pay for your gas & electric bill or you need to pay your rent, a short-term loan until you get paid can bridge the gap. If you are going to opt for an instalment loan, this is where multiple repayments come into play.
Multiple repayments can be stretched across a few months or they can be as long as years. Multiple repayments favour consumers who have established credit ratings and stable incomes because you need to consistently keep up with payments to avoid being charged late fees. Multiple payments are also popular in the industry because they show that more lenders want to focus on responsible lending by offering consumers as much choice as possible when it comes to repaying the loan.
Ultimately, from multiple repayments to interest rates, all borrowers ask themselves this question: is short-term borrowing worth it if the interest rate is sky high? It’s better to have an option to help you out of financial trouble than to fail to pay rent and be evicted from your home. Money helps you achieve your goals, and short-term loans can help you when you have a financial problem. The key thing is to always choose a responsible lender and to only borrow when you need a helping hand – because that’s the sole aim of lenders: to help you.