Sunday, April 6, 2014

Pay Day Loans, what's the market looking like?

At one point the pay day loans industry was a booming market, from 2009 to 2012 the industry saw rapid growth and companies were turning over absolutely ridiculous amounts because of the dying need for short term credit. After applying for a pay day loan the cash could arrive at the applicant's account in around just 10 minutes and provided access to quick cash to allow borrowers to deal with financial emergencies until they next got paid. There was nothing really like it on the market at the time other than the likes of credit cards or overdrafts at the bank, but these generally took a longer time to process when borrowers needed a quicker solution in our current fast paced economic society.

The idea behind pay day loans was a great one. An applicant would apply online for the money, and if approved it would generally be sent to their account the same day. They'd then simply repay the loan on their next pay day along with any interest that had accrued. Usually the interest on these loans would be around 25% over the course of a month, and whilst that may seem expensive they proved to be a cheaper alternative than falling into an unauthorized overdraft with many banks. However unfortunately many borrowers began misusing the loans and not putting in enough prior planning before taking a loan out leading them to fall into debt. Some lenders were also partly to blame as they were said to be failing to carry out adequate affordability checks. Either way pay day loans began to get a bad name and in 2013 the OFT wrote to around 50 pay day lenders telling them to basically clean their act up or leave the industry. As a result of this many lenders did actually end up leaving the industry and it saw the first decline in the market for around 4 years.

So with the industry beginning to get a bad name what's the industry looking like as we move forward through 2014? 

Well, according to this site the industry is set to half in 2014 & that's because of 2 reasons. The first reason being that since the industry is getting such a bad name and constant stories of debt are circling it many people are becoming reluctant to turn to a pay day lender to borrow cash. Cheaper alternatives such as credit unions are being pushed more and more and borrowers are beginning to turn to them instead.

Secondly, the FCA have just recently took over as the industry regulators at the beginning of the month. They are introducing strict new rules which was originally said to drive at least a quarter of pay day lenders out the market however reports are now claiming that up to half of lenders may leave.

So the market doesn't appear to be looking too great as we move forward, however there is also the intention to bring real time data to the industry & this could potentially turn things around. Basically the industry has mainly received it's bad name from so many borrowers who have taken out pay day loans falling into debt. Well one of the biggest reasons for this is that lenders are not able to get a proper picture of the borrowers finances when they apply as the credit reference agencies they use are only updated around once a month. If real time data is brought to the industry then lenders would be able to see exactly what the borrowers finances look like and would be able to make a better decision on their loan application based on that. Now since this would mean better affordability checks in place it would mean less borrowers falling into debt, and less borrowers falling into debt would mean that hopefully the industry would begin to clear up it's bad name.

So whilst many may think the industry is doomed, I personally think that now could be the perfect time to buy some shares and enjoy a good return on investment towards the end of the year or early 2015.

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