Loan Rates Are Rising in the UK

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( — December 28, 2018) — Loan rates are on the rise in the United Kingdom, according to data from the Moneyfacts UK Treasury Report. Data shows that rates increased on all tiers last quarter, from £2,000 to £25,000.

The data includes credit cards, unsecured personal loans, and overdrafts. Gone are the days when borrowers could get a loan without a guarantor and enjoy low interest rates, says Moneyfacts financial expert Rachel Springall.

Springall says the rate of a five-year, £7,500 loan has risen to 4.8%, up from 4.6%.

Economic uncertainty is putting pressure on lenders to rethink their pricing. Consumers are also facing a rise in household expenses.

Many consumers are turning to unsecured, short-term loans to cover emergency expenses, as it becomes harder to make ends meet. But the collapse of Wonga, a mainstay in the short-term loan industry, has disrupted the industry and paved the way for American lenders to fill the need.

U.S.-owned companies like WageDayAdvance, Sunny and QuickQuid are making strides in the industry despite a clampdown on high-cost credit by the UK’s financial regulator.

Wonga collapsed in August after a spike in consumer complaints over excessive charges. Interest rates, in some cases, were topping 5,000%.

The Financial Conduct Authority put a cap on unsecured, short-term loans in 2015. The cap kept lenders from charging more in interest and fees than the person had borrowed. Many lenders were forced to shut their doors.

But U.S.-owned rivals are filling the need for quick cash. Enova, a Chicago-based lender, saw its UK revenue soar 20% to £29 million. Elevate Credit’s UK arm saw revenue rise 23%, and new customer loans at Sunny, Elevate’s UK brand, grew by 45%.

Elevate’s success has come despite a rising number of complaints from borrowers. The company maintains that it is different from Wonga, and told The Guardian that they have “never charged fees, and imposed our own total cost cap even prior to the FCA rule introduced in 2015.”

The company states that the complaints against it “reflect the use of abusive and deceptive tactics” by claims management companies (CMCs). CMCs, which pursue complaints on behalf of their customers, are regulated by the FCA and are facing a tighter regulatory regime.

Some CMCs have come under scrutiny for failing basic checks and lodging complaints for customers who never took out loans with the respective lender.

Ultimately, CMCs are not the root cause of the problem for short-term lenders, experts say. If lenders hope to reduce the number of cases going to the ombudsman and avoid ombudsman fees, they need to settle customer complaints directly.

UK officials have criticized the industry, which they say has resorted to “appalling” tactics to reach new customers.

“This is appalling. I would hope that the representatives are turning up at people’s doors dressed as wolves, as that’s their behavior,” said Labour MP Frank Field, speaking of the firm Mr. Lender.

According to debt charity StepChange, 1.4 million people signed up for high-interest credit last year. The average debt, according to the organization, was £1,519. PDL Finance, Mr. Lender’s parent company, generated £2.6 million in pre-tax profits last year, up from £2 million the previous year.

In the last financial year, the Financial Ombudsman Service cautioned that high-cost credit increased by 40% to over 36,300. New complaints about short-term, unsecured loans increased by 64% to 17,200.

But many UK borrowers are left with limited options, causing them to resort to high-cost credit options. Credit unions, often considered safe alternatives to short-term loans, are closing their doors. Eight UK credit unions closed down in 2018.

The closings affected 14,000 people which had a collective of £25 million in savings.

Some of the credit unions collapsed due to fraud “committed by either members of staff or directors,” said the Bank of England’s regulation arm.

Even credit unions that have managed to keep their doors open had to curtail lending. Credit unions cap their lending rates at 3% per month.

Critics say that credit unions are hindered by a lack of professionalism, and many have been unable to provide the digital services that modern financial institutions require.

In some cases, credit unions are having to ask some of their customers with big balances to lower the amount they save so that the institution can reduce the size of its loan book. Credit unions are required by law to hold a certain amount of funds against its assets, and that amount has ballooned over the last two years.

While demand is there, executives at leading credit unions say that current regulations have forced them to “stagnate.” Still, Matt Bland, head of policy at the Association of British Credit Unions, says credit unions are “the most mature and well-developed alternative to high-cost credit.”