How high-cost loans are causing debt in the UK

Although there has been a previous crackdown on such high-cost short-term credit (HCSTC) loans as payday loans, limiting the number of rollover loans in addition to a capping to the maximum amount of money that can be borrowed, the past year has still seen a rise of £800 million extra in amounts of such high-cost short-term loans to be paid back in comparison to previous years, as illustrated in one of the Financial Conduct Authority’s Twitter posts displayed below. Although nothing like the lending volume rates seen in 2013, the FCA recent study into HCSTC loans has shown that rates have still increased significantly since 2016.

With loans being an average of £250 borrowed and £413 to be repaid, yielding a 65% interest from the original loan sum, it is no wonder that a staggering two-thirds of those who took out payday loan were over-indebted in comparison to the 15% of adults in the general UK population. In addition to these statistics, results from studies into this year’s HCSTC loans has shown that 60% of those holding payday loans were doubtful that they would be able to repay the loan back.

Although the statistics from this year’s analysis on HCSTC loans show a worrying trajectory with regards to the UK’s debt, these rising figures within the financial field of HCSTC loans certainly adding to the rise in the country’s debt, a personal finance analyst for AJ Bell has claimed that these types of loans are not the only contributor to the UK’s debt, further components adding to this being as follows:

• Credit cards: Last November an astounding £45 billion was racked up in credit card debt
• Overdrafts: £6 billion was also found sitting in UK overdrafts from the last year

Therefore, although the results from this year’s high-cost short-term loans are evidence of such loans becoming an increasing component to the UK’s debt problem, there are other areas of issue within the way in which the country provides and manages its loans.

The results from the FCA’s recent study in addition to the raised awareness of other types of loans contributing to this financial problem further display some of the major components contributing to the UK’s overall debt, and furthermore the areas to focus on to try an alleviate such financial losses within the country.

With reference to high-cost loans, more innovative lenders are looking at offering more payday loans alternatives including loans repaid in instalments, sustainable credit and personal loans that are based on credit scores.

The editorial unit