Over the past decade, specialist loans have become an accessible choice for those who require an alternative way of borrowing.
Specialist loans company Progressive Money decided to delve deeper into the market, exploring its recent history and the dramatic changes that have shaped the current lending landscape.
What are specialist loans?
Specialist loans differ from conventional loans in one major way. The companies who operate within this market loan money to individuals who perhaps wouldn’t meet the eligibility requirements of traditional lenders.
As such, specialist lenders appeal to a demographic who, traditionally, would struggle to acquire finance due to a poor credit rating, a less than perfect financial history or who would like to apply for a loan after being discharged from bankruptcy.
The specialist loans market encompasses a wide variety of loan types and lenders – which combined has contributed to a fast-growing sector. From 2016 to 2017, specialist lenders conducted the most new business – in proportion to the industry’s size – with almost a 20% rise in activity compared to traditional banks and building societies.
One notable sector within the wider specialist loans market which became prevalent in 2008 is payday loans.
Payday loans
Conceived as a way of lending money for short-term purposes, payday loans create an opportunity for borrowers to receive finance instantly – with the premise of paying the loan back at the end of the month when they receive their wage.
The performance within this sector was spectacular during 2008 to 2012, when it experienced its most significant growth. Lenders issued approximately 10.2 million loans per year, totalling around £2.8 billion throughout this period.
Among the most attractive reasons for borrowers included shorter application processes and decreased barriers to applying and acceptance for a loan. Increased success did create issues, however. For example, initially, there were no affordability checks for someone looking to acquire finance, which could cause problems when repayments were due.
Greater expansion of the market also brought increased regulation, with the Competition and Markets Authority recommending that new guidelines be enforced in 2017. This included the mandatory advertising of lenders on at least one price comparison site. Though changes were jarring at first, these new regulations have created a sector that is more transparent, encourages healthy competition between lenders and helps facilitate the entry of newer lenders – all resulting in a market that works better for consumers.
The Wonga effect
It hasn’t all been plain sailing for the specialist loans market. One prominent name within the sector is Wonga, known for their offering of short-term payday loans. New legislation, increased customer complaints and compensation claims made against them for business malpractices led to Wonga entering administration on 30th August 2018. It was a high-profile collapse that sent shockwaves through the industry – with greater scrutiny being placed on lenders as a consequence.
With the magnifying glass placed firmly on the market, the drive for transparency and higher standards among payday and specialist lenders has resulted in an improved service. More stringent affordability checks have been introduced across all lenders – ensuring consumers are fully aware of how much they are able to borrow given their current circumstances – and interest rates and fees have been capped at 0.8% per day. This has helped to create a lending landscape where borrowers can make a more informed choice – reflecting better on the industry as a whole.
Increased transparency, increased choice
The Competition and Markets Authority made recommendations – alongside the Financial Conduct Authority who enforced these changes on lenders – which resulted in a broader array of options for customers applying for specialist loans after being refused elsewhere.
Consumers can now access their credit scores by visiting one of the numerous credit report websites available online – but bear in mind that each with have their own unique scoring system. However, having these tools available helps potential borrowers better understand their financial situation, meaning they can make a clearer choice on which financial decisions are right for them.
Similarly, the information available to consumers – when they are looking to take out a loan – has been bolstered by websites that include information about APRs associated with loans, credit cards and other financial services.
The CMA-recommended listing of payday loan websites on price comparison sites has also made the sector an increasingly transparent place which favours customers and helps them make the best financial decision for them.
Loans for specific purposes are also available in the specialist loans market, where customers can apply for funds for a particular purpose. Christmas loans are one such example of a loan being taken out for a particular purpose. Increased spending over the festive period – with a typical British household spending an extra £500 in the month of December – has led some lenders to offer specialist loans to help cover the additional costs associated with the season.
As you can see, the market has opened up and expanded its range of choice for consumers. The positive effects of increased regulation – though met with initial scepticism by those in the industry – can now be seen bright and clear. Consumers looking for alternative loans now have more options to refresh their finances and greater information at their disposal, helping them to make the right decision for their situation.