The Rise of Unsecured Loans
The unsecured lending industry has grown after the establishment of the United Kingdom's financial watchdog- The Financial Conduct Authority (FCA).
Lending and borrowing were uncommon and considered harmful until the second half of the 20th century. When in the 1960s, the government moderated its banking sector for the general public, people started to understand and trust these utilities furthermore. With a slow yet steady pace of events, the practice grew simultaneously. Yet borrowing funds from unknown resources was still uncommon and unfamiliar to be accepted this early.
But necessity is the mother of all inventions and with time, people started to understand the benefits of borrowing funds externally. Along came the risks and responsibilities involved. People did not properly comprehend these elements of lending. However, this culture kept growing, things progressed with time, and with more awareness, more people opted for these funds. Moreover, by the last decade of that century, a new format of borrowing and lending was introduced, the “Unsecured Loans”.
Within no time, a number of people plunged into this market. New names of unsecured lending came into existence and various unsecured loan brokers came forward. More and more people could now obtain these funds more easily and conveniently.
But when there’s more abundance of something, it is usually misused and abused.
And in the year 2007-08, the major economies of the world took a massive hit, the global financial meltdown came down upon us. The symptoms started to appear within the mortgage industry first and the whole fiasco intensified after the Lehman Brothers collapsed. The economy of the UK and many other nations came crashing down and the people were left with nothing but crisis and debts.
This was a blooming opportunity for the unsecured lending industry. As the majority of citizens were under strict scrutiny and were imposed with layers of CCJs (County Court Judgements) and bad credit scores, they could do nothing but seek more finances to survive in the aftershocks, and these loans could help.
Also, it was soon observed that this kind of lending had become more and more damaging to the people of Britain. But now the majority of the population had grown habitual to this concept, and so the need for regulating this industry surfaced.
Introduction of the FCA and Stricter Regulation
Due to disastrous economic events in 2008, something that could not be forecasted by the existing financial authorities of the UK, the government decided to restructure their decision-making system. On 19th December 2012, the Financial Services Act (Financial Services Authority: the former financial authority of Britain) came into existence and it was dissolved with effect from 1st April 2013. Paving the way for a new watchdog for the city, the Financial Conduct Authority.
The FCA played a pivotal role in centralising data on ethical resources and regulated the entire industry altogether. A new set of instructions were rolled out and new policies were formed to undertake and protect the financial well-being of Britain.
This proved beneficial. And made it mandatory for a lender to conduct credit checks on loan applications before disbursing funds. Making a prior assessment of a consumer’s repayment affordability is a necessary requirement in order to keep the industry stable and to promote healthy competition. Awareness campaigns and further capping on loan applications for high cost short-term (payday) were successful in easing things up. Many borrowers, who were stuck in never-ending debt spirals and traps of unethical loan sharks, could now obtain these funds more securely and transparently.
New applications of borrowing started trending and new formats of loans formulated. With a regulatory body specifically designed to tighten the screws when needed, these loans became a financial utility again.
The unsecured market, which never really faced negative disparities in terms of industrial growth, could now grow in a more structured manner.
Applications of Loans and the Need for Capping Them: The Payday Disaster
According to reports from the Office of Fair Trading, the payday loan industry grew substantially in the previous decade. From 900Mn GBP in 2008 to a staggering 2.0Bn in 2012 and the growth could not be contained ever after. It presently stands at a whopping 2.8Bn Pounds worth of lendings in the UK.
Due to increasing unemployment within the younger generation of Britain, it seemed a viable option to provide for the “daily basics” of their lifestyle. But when you seek a loan without its repayment affordability on your end, the bridge of stability collapses eventually.
The majority of these people faced debt issues in the next few years. According to reports, 52% of payday loan consumers experienced issues in repayment and succumbed to trailing debts, 38% incurred a bad credit rating, 35% had to make arrangements with creditors, 11% of them were issued CCJs and 10% have been visited by debt collectors in the previous 5 years.
Research by the FCA claimed that about 4.1Mn people in the UK are facing serious financial difficulties. All these reasons led to the decision of capping these loans, so in 2015, the FCA intervened. A capping mechanism was put in place and the interest rates and default fees involved in the process were restricted to a specific amount. The figures stated:
• Interest rates could not be more than 0.8% per day.
• No more than 15 pounds can be charged as fines for a default on repayments.
• The total amount to be repaid, including fines and interest, could not be more than 100% of the total amount borrowed originally.
Due to this, many lenders ran out of business and left the market altogether. The payday giant Wonga collapsed after numerous complaints and PPI (payment protection insurance) claims against it. And the rest of them had to concrete up, in order to face the situations at hand.
But all this proved beneficial for the consumers of unsecured loans at large. Yet still, the unsecured lending culture could not be subdued or undermined. It continued to grow and had the pace needed to become more convenient and useful for the masses of the country.
Yet and still, many of us think that these loans are more expensive than helpful. As only a tomfool can never understand the importance of financial freedom and the price you have to pay for it. And when the financial need appears, it becomes absolutely necessary to seek funds appropriately and timely. With an unsecured utility by your side, you get these opportunities for a relatively affordable trade.
Concluding, this industry has majorly been stable. Moreover, it has shown commendable growth at times. Unsecured loans have helped various households to drive through economic ups and downs we have faced in the past. And hence yes, “These loans are sufficed enough to provide for the major financial constraints you may face, transparently and beneficially”.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Shuvam Samal