3 months into 2015 and it appears that the ‘post payday’ boom in guarantor loans continues to be the main area of product development and innovation in consumer lending. For a period in 2014 it looked like revolving or flexible credit products were going to be the next big thing, but whether due to regulatory pressure, lack of certainty over returns, or the overall commerciality of a product mainly designed to get around the FCA’s rules on the use of continuous payment authorities on high cost short term credit, the expected growth has not yet emerged, leaving Guarantor loans as the big mover.
From the original two or three lenders (Amigo, UK Credit and TFS) in the guarantor space there is now a plethora of lenders, with new ones popping up on a weekly basis. This continued growth can be viewed as both a good and bad thing for consumers. Typically in a growing market competitive forces will lead to an improvement in the quality of the offering which, in financial services generally means lower prices or broader acceptance criteria. This can certainly be evidenced when looking at the competition whether that be through a comparison website, your local broker or the massive volume of TV adverts.
The initial loan offering of max £3,000 has continually increased and it is now the norm to be able to borrow up to £5,000 and often up to £7,500. In some cases it’s possible to borrow up to £12,000 so long as you tick all of the correct boxes.
Equally, the maximum term of guarantor loans continues to increase, with some lenders now offering a maximum term of 7 years. There is definitely a case of buyer beware with these longer term loans though as the total repayable on a £12,000 loan over 84 months is high. It may be that there are better options available.
From the processing side of the loan, innovations and regulatory pressure are, as ever, being interpreted and handled differently by different lenders. There has been a very clear shift to each lender being able to ‘tick the box’ on affordability both for the guarantor and the applicant. This has been driven by the FCA as part of their consumer protection drive and is unarguably a good thing for the consumer. Lenders vary in how they prove this significantly with some talking to the customer over the phone and using a set of assumed factors, whilst others require detailed bank statements and payslips. Some will consider a loan ‘affordable’ with a simple calculation of “if income > monthly commitments + loan repayment = lend” whereas some others will require a minimum safety buffer on top of all known expenditure.
The use of electronic verification tools seems to be increasing slowly, but take up is nowhere near as high as in the HCTSC market, presumably due to the high level of manual contact and other fraud prevention techniques that make the additional cost unwarranted.
One final area that appears to be changing is the interaction between the lender and the guarantor. An area of regulatory concern was the immediate impact on guarantors in the event of payment difficulties. Lenders are again taking their own interpretation of the FCAs statements with some still going after the guarantor for payment within 24 hours of the original due date whilst at the other extreme one lender does not even take payment details from the guarantor and will not approach them until the original loan has defaulted (i.e. at least 3 months down).
Over the next 6 months all of the lenders in this space will be completing their FCA applications for full approval so it will undoubtedly be a period of continued change. The consumer risk is that these, often significant, variations are not immediately obvious to customers who could end up with a sub optimal solution. As ever, the message needs to be, investigate your options and understand exactly what you are signing up for.
Learn more about guarantor loans in our guarantor loan section.