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Stricter Lending Criteria May Push More UK Citizens To Payday Loans

by Jim ONeil on January 7, 2012

in Payday Loans News

The Bank of England (BOE) published its Credit Conditions survey on Thursday and this did not contain good news. Banks in the UK are expected to tighten their personal and business lending criteria during first quarter 2012.

Contributing factors include a weakened economic outlook and pressures within wholesale funding markets. As bank financing becomes more difficult to obtain, many UK citizens are expected to turn to expensive alternatives like payday loans.

According to the BOE, lenders will increase credit score requirements for mortgages. They will also include stricter covenants in business loans for medium and large companies.

During the current quarter, the impact of euro developments on the bank funding environment will determine the availability of credit.

In December, the BOE Financial Policy Committee reported that the euro debt crisis has increased the risks to financial stability in the UK.

Prior to this report, lenders were expecting the next three months to reflect a slight increase in credit availability. Central bank data revealed that November mortgage approvals were little changed.

During the fourth quarter, mortgage demand declined and a further decrease is expected in the current quarter. Homebuyers will also find it more difficult to obtain a mortgage, as they will need a higher credit score to get one.

However, the real concern lies with those who are already in a home. According to a recent report from the homeless charity Shelter, millions of UK citizens are using credit and payday loans to remain in their residences.

During the past 12 months, nearly one million Brits have used a payday loan to pay their mortgage or rent. An additional seven million are paying with credit cards, loans bank provided, or unauthorized overdrafts.

An ensuing battle with debt could result in a huge increase in homelessness within the UK.

Shelter Chief Executive Campbell Robb referred to the statistics as “shocking” and very revealing regarding the state of UK households trying to keep a roof over their heads.

He noted that using payday loans to fund housing costs is “totally unsustainable.” This concern does not lie with housing alone.

During the holidays, a record number of UK residents were expected to use no credit check loans like this to fund their giftgiving and entertaining.

Insolvency agency R3 discovered that approximately two million UK residents have recently applied for a payday loan. Forty-five percent of people surveyed said they were struggling to make ends meet between paychecks.

Payday lending offers a way to do this. However, loans APR as high as 4,000 percent make it easy for consumers to take on more debt. Shelter recommends that individuals grappling with debt get help immediately.

A payday loan should only be considered when other financing is not available. By promptly repaying this loan, consumers avoid huge interest rates.

Using a payday loan to cover housing costs is not recommended because it can create a cycle of dependency. UK residents who need help with monthly expenses like the mortgage or rent should consult with a debt management professional.

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