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Unsecured Loans - has it got more complicated?

When borrowing money, other than from your friends or family, there has often been 2 distinctive choices of where to borrow from. You can speak to your current bank or building society - or you can search online.

Online searches for loans have massively increased over the years and, especially since 2008, the amount of people searching for a payday loan has increased as the sector grew year on year. For those that do not know a payday loan is, typically, a loan of less than £1,000 that is due to be repaid for a short period only - until you next get paid - hence the name. A payday loan is purely designed for short term borrowing needs only - like an emergency situation.

The UK public have therefore seen a clear distinction that, normally, a loan of under £1,000 is a payday loan and a loan of more that £1,000 is an unsecured loan - sometimes referred to as a personal loan. There have been lenders that have slightly “blurred the edges” on these distinctions but in general, this has been the case.

The FCA (Financial Conduct Authority) took over from the OFT (Office of Fair Trading) in 2014 regarding the regulation of, amongst others, payday loan lenders - effectively tightening up lending rules and various aspects of how customers can be offered a loan and the options available to the customer once they have taken the loan. Generally seen as a positive move for the industry, this has resulted in some lenders having to exit the market, however, the other knock on effect has seen a different type of loan emerge.

A key aspect that the FCA introduced in early 2015 was the daily rate of interest cap on payday loan lenders of 0.8% per day. This resulted in a 30 day loan, of £100, costing the customer £124.00 as a maximum. Lenders have therefore looked to offer customers longer loans - and payday loan lenders have effectively become unsecured loan lenders offering loans from 1 month to 12 months. Whereas the UK public would have struggled to find a lender offering a loan of under £1,000 for any longer than 30 days - now these options exist in abundance.

Has the loans market become more complicated? I think it’s a mindset of the consumer that may need to adapt over time. In general the changes have been positive as consumers are gaining more choice on how long a loan can be borrowed over for any loan amount. More and more comparison websites are starting to appear offering customers the choice and the ability to compare loans.

This was posted in Bdaily's Members' News section by John Cringleford .