If you were fortunate, or unfortunate enough (depending on your perspective) to have spent any time watching TV advertising in the last few months, you will undoubtedly have seen the latest, frankly astounding, innovation in the UK consumer credit market. For those who have not had the pleasure, your mind may be running away with a whole range of ideas and innovations that you would like to see:
- A cheap rate loan, guaranteed acceptance for everyone!
- A loan where the lender pays you money!
- A loan that is already in your account before you realised you needed it!
The actual answer is, perhaps, a bit more underwhelming. The latest high profile innovation is in fact a loan that you can repay in multiple payments (or bits, bites, segments, pieces depending on the marketing team in question). Hmm, not really that much of an innovation is it?
The questions that then need to be asked are:
- Why are lenders now offering these ‘multiple payment’ loans
- Why are they making such a big deal of it on TV
Why the Change to Multiple payment?
To help understand the focus on these ‘new products’, you need to look more closely at those companies offering them, or in some cases the parent companies. Most have a direct link to traditional, single instalment ‘Payday’ loans or other high cost products. This is not true in 100% of cases, but holds out pretty well.
In the 10 months the FCA have now regulated the consumer credit market, they have made a number of big changes. This is particularly true in the ‘Payday’ of High Cost Short Term Credit sector where changes have included:
- Capping the total amount repayable
- Capping daily interest
- Capping default fees and charges
- Restricting the use of Continuous Payment Authority (CPAs)
- Restricting the use of rollovers (where a loan is rolled over for a period of time to allow the customer more time to repay – but whilst charging very high daily interest)
These rule changes have not completely killed the single instalment market, but has made the lenders look much more closely at their models. With a regulator who is very focussed on customer outcomes, business models where high proportions of income come from rollover interest or default charges are hard to justify. The regulator has shown with one or two of their recent decisions in this market place that Lenders have to prove they are playing ball, or face the consequences. It’s little surprise therefore that many lenders are looking at alternate models that are more customer friendly
Why the big TV focus?
Dedicated observers will note that TV payday advertising has all but disappeared. There is very very little focus on it due to the changing regulatory pressures. The lenders, and the companies backing them are still looking to make as much money as possible. This means they need to advertise and drive custom. The fact that what they are leading on is neither new, nor innovative is not important. Instalment loans are seen as a better customer option than single instalment, so attract less regulatory pressure and actually over a period of time can make the lending company more money. Instalment loans are not the first old product to be packaged up as something completely new and exciting.
So in summary, don’t be hooked in by the TV hype. A multiple payment/bite/bit/segment/chunk loan is just a loan. It will need to be repaid in a number of payments over a period of time. What is important is that you choose a loan that suits you – not one that has the best advert.