Short term loans and why affordability plays such a large role

In recent year’s short term loans have come under increasing pressure from regulators to improve both their product and service being offered to customers. Short term loans are also known as payday loans and instalment loans and are usually accessible via the completion of an online based application form. These loans have actually now been available via these means for more than a decade and as such have established themselves as an often used consumer borrowing tool. Over the years many millions of consumers have turned to short term loans when they have had a requirement to borrow a small sum of money arise. These loans are usually offered as either one-off repayments or via the means of monthly instalments, with loan values which range from £100.00 to £300.00 normally and in some cases, loan values are offered up to £1000.00. Over the years the market has certainly experienced ups and downs as far as customer satisfaction is concerned, with the resource itself being called into question over the years. With this in mind it is not surprising then that in recent years the market has had to answer to the demands of a newly appointed regulating body; the Financial Conduct Authority.

The Financial Conduct Authority was introduced as the regulator of short term loans in an effort to bring this vast online consumer borrowing resource into line. For many years many lenders existed within this market and it was felt they had in many ways lost sight of how to effectively serve the needs of short term borrowers. In the early days of the market the products on offer were hailed as much needed and able to fill the gap in terms of the gap between small time borrowing and larger borrowing offered by long established borrowing facilities. The loans on offer enabled consumers to borrow on a small scale; something which had not been readily available before and the result was that consumers were welcoming of such an option. Over the years though it became clear that although the need for short term borrowing was very much present, the manner in which short term loans lenders operated was not ideal.

In order to understand this further the FCA conducted a complete review of the market and exactly how it had come to serve short term borrowers. The result of this research was clear; short term loans lenders were not considering their applicants ability to repay the loans being granted in an effective manner. In more simple terms this meant that lenders were not fully considering affordability. The application of affordability; meaning to fully understand an applicants true ability to afford a form of borrowing, is just as important in short term borrowing as it is for any other form of borrowing. In order to ensure going forward short term loans lenders recognised this fact the FCA made a number of key changes. These changes were applied to lenders via new rules and regulations and therefore better guidance to lenders who truly wished to support the needs of short term borrowers.