In 2012 short term lending, especially Pay Day loans, went largely unregulated. From the high street to the internet, the short term loan market exploded in popularity as borrowers responded to the convenient access to quick loans. Despite the positives, the risk of getting trapped in a downward spiral of borrowing was becoming a reality for a lot of people. We launched our own Pay Day loan product in 2012, after a successful trial, to offer a much more reasonable alternative in the market. When developing our product, we were shocked to see some of the practices enacted by opportunistic companies at that time.
Keeping a lookout for these practices, and others like it, can save time, money and anxiety in the long run:
Rollover credit
This can manifest in either informing you that you can just move into a new loan, or defer payment until next month. This is not only bad because the company may charge an arbitrary fee on top, but also the interest is charged on the total amount that you currently have outstanding. This is why we hear about people having to pay back double of what they initially borrowed.
Our CUOK! Loan is set from 1-3 months and that is it. Members will always need to submit a new application before having access to any further credit, so that they are more aware of their borrowing.
CPA abuse
CPA stands for continuous payment authority. Loan providers will have to ask permission to continually to take payments from your bank account. However, before the regulations, this meant that unscrupulous lenders had the power to debit from your account at any time, multiple times. This has largely be solved by government regulation in 2015, but it is always good to be aware of how the lender wants to receive repayments.
Our CUOK! Loan is repaid using reputable payment company SAGE, to set up an agreed collection schedule. LMCU can always be contacted to discuss any issues with repayments.
Poor affordability checks
The Pay Day loan market is about volume, and the ability to get their customers approved and the loan transferred quickly is often a key marketing point. Unfortunately, what this means is that there is little oversight on who is receiving these loans, and whether they have the ability to repay. This negligence can be as damaging to the borrower as the lender.
Our CUOK! Loan has automated system checks that process applications, and if one of those checks fails then our Loans Department will process it manually to make the final decision. Currently it can take up to three working days, usually less, to contact people with a decision. We understand that we have a responsibility to make sure the right decision is made for any borrower, and London Mutual Credit Union as a whole.
Early/late repayment charges
While sticking to agreed date is important, some companies over penalise their customers with unreasonable late fees, even when there is an explanation for the late payment. People can also be charged an early payment fee, which can be seen as a way for the company to make up on lost interest.
Our CUOK! Loan has no late or early penalty charges – if a loan is overdue then it is only interest that is continued on at the same rate, and if a loan is repaid early then the borrower actually saves on interest.
High interest rates
Loan companies take on risk and commit resources when lending, and interest is meant to reflect these risk and cover expenses. The unique position of short term lending is that desperate people will agree to large interest rates if it means securing the money quickly, and only realise the size of their financial commitment later on.
Our CUOK! Loan interest rate is set at 42.6% and we confidently say that this rate can compete against any other short term lender. We hope to draw people to London Mutual Credit Union, so they can see that we offer other services that we hope they consider using.
Six years later, people have become more aware and regulations are in place to reduce the impact of unfair practices. We continue to believe that having an alternative short term loan product is still needed, along with other financial services, to help our community.
