Short-term loans are often
considered controversial. They are quick and easy to access, as well as being
available to people with poor credit, but also tend to carry extremely high
interest rates and other charges.
Despite mixed opinion, it is
impossible to deny how much the market for short-term loans has expanded in
recent years. One of the most common forms of short-term credit, the payday
loan, has exploded in popularity. While experts say there are no firm figures
to quantify this extremely rapid growth, they have all noted that the sector is
continuing to expand.
Much of the popularity of short-term
loans comes from their accessibility. Often they are provided by online
companies who ask little more than some basic details and that you hold a bank
account with a debit card. Crucially, they are also available to people with a
less-than-perfect credit record.
But will this expansion continue?
Ten years ago, short-term loans were something that were associated with
certain sectors of the public, particularly low-income families and those on
benefits or with a limited earning potential. However, people of all ages, from
all backgrounds, career paths and education levels are starting to consider
short-term loans to be a viable credit option.
Much of this is related to the
extreme financial changes the country - and indeed, the world - has gone
through in recent years. The credit crunch and subsequent recession put us in
an economic situation that we had not seen for more than 70 years.
After an extended period of 'boom',
where house prices and levels of consumer spending soared through the roof, we
crash-landed into an economy of 'bust', which saw severe contraction, a
significant reduction in the availability of credit, widespread redundancies
and a spike in mortgage foreclosures.
It is in these circumstances that we
saw the rise of the popularity of short-term loans. People who had never
experienced financial hardship before - middle-class families and high-flying
professionals - found themselves struggling to pay the mortgage.
Redundancies weren't largely
confined to the traditional labour sectors, such as in the recessions of the
1970s, 1980s and 1990s. As well as retail and construction workers, specialist
engineers, highly experienced academics and private sector executives were
finding themselves without work. And those who were spared redundancy were
often put on reduced hours or limited income. A whole new generation and
demographic of people were facing financial difficulty.
Many people also found themselves
with damaged credit scores as a result of mortgage, loan and credit card
defaults. Faced with constricted credit and a shortfall in income, more people
began to see short-term loans as a choice that could work.
This appetite and acceptance of
short-term, high-interest loans is directly related to this economic upheaval.
Lenders are providing for a gap in the market between traditional, long-term
credit solutions, which are harder to access, and customers that need quick
access to cash to cover unexpected expenditure.
It is fair to say that the
popularity of this loan will continue for as long as the economic uncertainty does.
While banks and other lenders continue to be cautious and restrict the
availability of more affordable credit, people will look for other solutions.
Of course, there is the issue of
whether short-term loans are being used in the way they were designed, or
whether more vulnerable people with deep-rooted financial difficulties are
using them due to the ease of obtaining short-term loan cash. This is
understandably a worry and something that the Office of Fair Trading is
investigating in regards of payday loans.
Short-term loans have established
themselves to a degree where they will never completely disappear. However, as
the economic situation stabilises in future, it will likely lead to a fall in
demand for short-term, high-interest credit.
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