Sub-prime lending in the UK is alive and well. Demand for Payday Loans, Logbook Loans and Guarantor Loans is soaring. And with the country's recessionary phase now into its fourth year, these high-interest short-term loans that were previously only popular with the sub-prime sector are now being taken up by so-called 'Middle England'.
In many cases, this group of newly-stretched individuals is also resorting to more 'respectable' sources of personal credit such as P2P Lending (aka Peer-to-Peer or Person-To-Person Lending), pawnbrokers and pre-paid credit cards. For the more prudent, there are always old standbys such as Credit Unions.
What's going on in our economy that's driving so many people into the arms of ridiculously expensive lenders and online opportunists who are charging outrageously high interest rates of up to 4,000% APR in the case of Payday Loans?
Let's take a closer look at the type of credit we're talking about:
The bête noir of the sub-prime stable, these online loans are surrounded by controversy, largely on account of their sky-high annual interest rates (APR). Although payday loan companies were originally given a green-light by the Office of Fair Trading, a rash of recent complaints about their aggressive chasing of defaulters has led to closer scrutiny of vetting procedures and in some cases the withdrawal of their licences to trade.
On the face of it, a short-term loan using your car as security seems like an OK kind of idea. You hand over your V5 Registration Document (formerly known as a 'log book') for the duration of your loan. When you've paid it off, your V5 is returned and the car is still yours. Fine so far. The problem is, with APRs of 400 to 500%, you'll pay a king's ransom to borrow a relatively small amount. For example, borrowing £1,500 for 18 months could end up costing over £4,000. Not surprisingly, a high percentage of people default on their Logbook Loan and end up losing their car.
These are loans granted to a less than credit-worthy borrower that are guaranteed by someone nominated by the borrower who must be a home-owner and have a good credit history. The lenders therefore have rock-solid security whilst enticing vulnerable people into a situation where a friend or family member is obliged to bail them out if they default on the loan.
Mainstream lenders have bolted
It's very clear that the new financial landscape in the UK is peopled by online opportunists and other traditionally exploitative service providers. They haven't been slow to fill the vacuum left by mainstream lenders when they pulled out of the personal finance market with such unseemly haste. Their abdication of any responsibility for the consequences of their actions doesn't take into account the long-term effects.
The current state of the market stands like a massive social obelisk, a memorial to a deluded 'something-for-nothing' culture. It also reinforces the perception that the big banks have hitherto been little more than a financial instrument of the state, with scant regard for the interests of individuals.
If you think this is over-stating the case, cast your mind back to the altruistic 'mutual' principles on which Victorian building societies were formed - or, indeed, the co-operative movement whose ethical 'caring-sharing' principles are once more delivering the deserved dividends that chime with present-day values.
A sad thing about some of the new players on the financial block is that they are without doubt 'parasites' who are capitalising on the economic misfortunes that have befallen so many in the current age of austerity and recession.
If their burgeoning success continues, there's a risk that they will become the new bloated 'establishment', adopting all the arrogant, oligopolistic practices of their predecessors that will rapidly overshadow the supposed flexibility of their enlightened business models.
A Root and Branch Revolution
The new financial shake-out - call it a financial services revolution if you will - has nevertheless had many positive effects, not least of which is the fact that the market is now open to many more players. In theory, this gives consumers a wider choice of lower-cost services where only the most cost-favourable operators will survive. Contrast that with recent behaviour of the big banks who have given themselves carte blanche to introduce new charges and apply interest rates that are totally out of kilter with the record-low Bank Rate.
In practice, elasticity of demand allows the new financial operators to charge equally usurious interest rates because they know the market will stand it! When the only access to short-term finance is through online operators and other expensive bolt-holes, desperate and vulnerable members of the public are limited in their choice of affordable options.
Such is the confidence of the new lenders, however, some are now moving into the mortgage market and lending to small businesses whose access to finance has been blocked in equal measure. Some would argue that opening up the market in this way is a good thing, but there's always the danger that desperate people will be seriously exploited.
Despite government attempts to regulate the market, there's a whiff of the Wild West about all this. Yes, the new service providers are meeting a need, but at what cost? The financial and social damage that a semi-regulated financial services sector could wreak on the wider economy - in both the short and long-term - doesn't bear thinking about.
Outrageous interest rates notwithstanding, the social and fiscal costs of increasingly divided societies - encouraged and enhanced by the lax control of credit providers - will far outweigh what we've witnessed so far.
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