After half a decade’s credit deprivation, people in the UK have begun seeking and getting credit again. Unsecured debt rose by 9% in 2014, higher than it has been in over seven years. Roughly translated, that amounts to approximately £9,000 in unsecured debt per household. And that is projected to rise to £10,000 per household by the end of 2016.
Before we all chime in with festive dances and happy songs, we might give a thought to whether our renewed love affair with credit is in our best financial interests, as individuals and the Kingdom as a whole. For one thing, we need to look at the kind of credit we are taking advantage of, and how well it serves our financial needs.
The types of loans that are gaining popularity has shifted
Payday loans – There was a time not so long ago that payday loans were typically a borrower’s last legal source of available credit when no other sources were available. There was even a bit of a stigma attached to such loans and the people who sought them. With the economic crisis, that all changed. When even some of the formerly credit-worthy individuals couldn’t convince their long-time bankers to approve loans such as had been readily available to them prior to the crunch, it was inevitable for those newly-rejected borrowers to look elsewhere. Payday lenders had correctly anticipated this emerging market, and geared up for it. The rise in popularity of payday loans caught regulators by surprise, and there were many abuses by lenders before the government set caps on how much they could charge in interest, fees and penalties.
Despite the higher cost of payday loans, they became the most popular form of credit in the UK, and with the constraints included in the new regulations, the abuses by payday lenders have diminished significantly, rendering the loans more popular than ever.
Credit cards – Issuing companies have in the recent past engaged in such aggressive marketing practices that they have caused the government to look more closely into and apply additional restraints upon those practices. The companies still tend to avoid issuing their cards to individuals in high-risk groups, such as those just beginning to establish credit, those with low income, self-employed individuals and those with a history of credit problems.
However, they continue marketing to people who have a history of making minimum payments, despite the fact that such individuals are likely to exhibit a pattern of financial difficulties. The card companies accept the risk in approving such individuals because the minimum-payment accounts are easily their most profitable, offsetting the risk that some will default on their payments. Because credit cards are easier to obtain than traditional loans, their popularity continues to rise.
Instalment loans – These loans are typically for relatively small amounts, and are made on a short-term basis, often with greater flexibility in repayment than payday loans. While they usually offer lower interest rates than those charged by credit card companies or payday lenders, their rates are still somewhat higher than those applied to more traditional loans.
Instalment loans also offer the borrower a more stable payment schedule than payday loans or credit card balances, so that the borrower knows ahead of time exactly how much the monthly payment will be. This can be particularly helpful to the borrower’s efforts to set and adhere to a budget. Instalment loans are marketed primarily to individuals whose credit history places them in a lower risk category than those who routinely seek payday loans or credit card advances. Interest rates and terms can vary significantly between lenders, and while the loan might not be approved and processed quite as quickly as a payday loan, the delay can be offset by the reduced cost of the loan.
Our return from the financial abyss of the last seven years has been a long and tedious one, and it is reassuring to see conditions improve. Hopefully, we have learned a lesson in the process, and will strive to keep a tight rein on our indebtedness. We are only human and it is understandable that we would jump at the chance to enjoy something to which we’d long grown accustomed, but which had been denied us for a number of years. Let us just make certain that we don’t allow our jubilation and renewed confidence to overshadow our common sense, and lead us back into that abyss once again.