6 Month Loans and affordability
Warning: Late repayment can cause you serious money problems
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Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
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Author: Internal Marketing Department
In the past customers using short term lending were very restricted in their borrowing options. At the time the majority of lenders focused their efforts on delivering an excellent speed of service instead of variety. This meant there were plenty of lenders in existence but the choice of product was pretty much identical. In the modern day market things are very different and a customer can expect a great selection of lenders and more importantly products. Now lenders are offering the likes of 6 month loans, which allow the customer to spread their repayments over a more affordable term. This is a massive step forward for the industry and with these new loans comes a better overall approach on the lenders part also. The application process for such loans, although still relatively quick and fuss free, now expects more information than ever before and equates to a greater level of assessment on the lenders part. With this in mind it is important to understand the likely checks and therefore the information that will be required from an applicant.
In the past the limitations of the product offered along with less emphasis on responsible lending meant that lenders checks too appeared to be somewhat 'light'. The focus of the product for many as mentioned was speed of application with lenders fighting to promote how quickly they can help. The product itself was very simple and lenders clearly explained and displayed their offerings as part of the explanation of ease and speed. Typically a customer could borrow between £100.00 and £500.00 and if approved could expect to repay this amount with interest on their next employment pay date. Interest was typically applied at £30.00 for each £100.00 that was borrowed so quickly the amount due on the agreed date become a sizable amount.
For many the option to repay in full was not the main driver for the loan and instead many felt the extension payment provided the greatest benefit. An extension allowed the customer to repay simply the interest on the agreed date and in making that payment the full balance could be delayed until the subsequent employment pay date.
Using the example above a customer borrowing £200.00 could expect an extension to cost £60.00 whilst the full repayment would remain at £260.00 until it was repaid as a lump sum. It is unsurprising then that some consumers found themselves consistently paying the extension, for many months on end and never being able to successfully afford to repay the full amount due. This of course caused all sorts of problems, not only did consumers borrow from multiple sources to cover their debts but also many reached a point where simply extending was the only option. This highlighted a real need for change, lenders were certainly working against consumers instead of with them, particularly where those in financial difficult were concerned. This ultimately begged the question as to why lenders were allowing certain customers to obtain loans when clearly they were not affordable.
In the current day market things are very different. Not only have the loans changed with many lenders now offering 6 month loans but also the way the lenders approach approving applications has changed also. Nowadays affordability plays a large role in making sure the application should be approved. A lender will typically now ask the applicant to provide full details relating to their income and expenditure as part of the application process. This means the customer stating full details of what they have coming in and going out of the household as part of applying for a loan, for more information click here. By gathering this information the lender is able to gather a much greater level of insight as to how affordable the loan is likely to be. This information can of course be compared to the information that is available on the customer credit reference file also.
The changes made by the current day lenders really serve to reflect the need for adjustment compared to the old style of lending. Many consumers were lent to when effectively it was unrealistic for them to have done so. In order to break cycles of debt consumers and lenders alike need to recognise when a loan is affordable and when in fact this is quite simply not the case. For those consumers where the likes of 6 month loans are not possible, there are many free government and charity based organisations who can offer guidance and advice on dealing with current debt.
Editor: This article describes products offered before FCA regulations such as Cost and Extension Caps.Some of the rates and practises would not be permissible under current rules.