Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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Personal Loans IN - Payday Loans OUT?

Comparing Unsecured Loans vs Payday Loans

There is a new kind of loan available, to the UK public, that has appeared with little fanfare or hype at all. 
 
January 2015 saw the FCA (Financial Conduct Authority) impose an interest cap on short term loan lenders of 0.8% per day. This has created a massive impact on UK lenders that has seen the majority of them have to reduce the interest they charge to their new customers. 
 
These regulatory changes have had a knock-on effect with many payday loan lenders. These lenders have expanded their range of lending products, from the traditional payday loan, to a longer term product. Companies such as Lending Stream, Sunny and Quick Quid all offer loans up to a period of 6 months – as well as others. If you rewind to 2014 there was a severe lack of loans available for between 2 months and 1 year – this gap is now rapidly being filled as lending companies look to fill this space in the market.

Affordability of a Loan

A payday loan is always due to be repaid, as the name suggests, on the next pay day. A loan over 2 months, or longer, simply sees the total repayment split over the number of months that the loan is taken over.
 
An example of this would see a loan of £750 taken over 6 months result in a total payback of £1489.83. This would mean a customer repaying 6 equal payments of £248.30.
 
How would this compare to a £750 payday loan?
 
Naturally, a payday loan of £750 would be paid back on the next pay day which would normally fall between 7 and 31 days of the loan being received. Total payback would be £930 (note this repayment is £559.83 cheaper in total compared to taking the loan over 6 months).
 
The key in these comparisons is affordability. 
 
It could be argued that many people would struggle to repay back £930 within 1 to 4 weeks of borrowing £750. This is where the 6 month loan would be deemed more affordable on a monthly basis – despite the total payback, including interest, being more than £550 more expensive.
 
Is the emergence of new short term lenders a good thing? Yes, it provides the customer with more choice. At the time of writing the majority of these lenders still offer a 1 month loan also. It is realistic to assume that, over time, the amount of lenders offering a simple 1 month, or payday, loan will reduce. If that does happen it will be a negative impact of the FCA’s action on the short term loan market. You could argue that the FCA regulations, if the traditional payday loan disappears, has forced some customers into a longer term loan that, not only do they not want, but that also forces them to pay more interest back in total. 
 
The payday loan is here to stay, for now, however it is clear that there is a new loan on the block. The new loan isn't really new, it's simply an old loan, that's making a big comeback.

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