Traditional loans are still prevalent, but more and shorter term loans are being made available in the UK. This may be attributed to the credit crunch that has occurred over the last 5 years, declining incomes vs. rising prices or other demands in the marketplace. Historically, short term loans in the market were dominated by following three main needs:
- Banking Overdrafts: These short term loans are typically supplied by the bank itself
- Credit Card loans
- Doorstep Lending: Now called Home Credit, providers issue small cash loans. To guarantee repayment, lenders send a representative to recipients home each week to collect.
The Change and Growth in the Industry
Recently, banks have drastically tightened their criteria for issuing loans. As a result, providers of traditional loans have all but disappeared. This has left people in need out in the cold. To fill the gap, there has been a rise in Payday Lenders.
The payday model was an American phenomenon. Payday Lenders were able to issue short term loans to those with less than perfect credit histories. This model proved to be very popular and quickly entered the mainstream conscience of the American population. Short term loans are attractive because they offer a quick fix for financial short falls and can be issued almost immediately.
Types of Short Term Loans
Consumers in need of a small loan enjoy several types of loans:
- Installment Loans: These loans are repaid and are much like traditional loans. Rather than paying off the balance at once, consumers who choose these loans can spread weekly or monthly payments over time – usually up to one year.
- Logbook Loans: Logbook loans require some type of security like a car. The maximum loan amount is then based on the value of that car. Providers may offer a loan, for example, that equals up to 75% of the car’s value. This amount is subject to suitability and affordability for the applicant.
- Home Credit: A type of loan that employs home credit remains a popular choice for many because of its relative convenience and ease.
Problems in the Industry
Poor lending practices led to tightening regulations by the Financial Conduct Authority in the U.S. As a result, the number of loans issued for the short term by providers has shrunk. The loans themselves, however, remain attractive to consumers. In the U.K., providers offer short term loans that are smaller than the traditional-type loans, typically offering loan amounts of between £200 and £1000.