Research undertaken by Everyday Loans has revealed that most customers searching online for a personal loan find it difficult to distinguish between lenders and loan brokers and are very often confused about who is providing them with finance when they apply online for a loan. This has highlighted the confusion that customers face when their bank declines them for a loan and they have to search for an alternative loan provider.
With the impact of the credit crunch still being felt in the personal finance sector access to cheap loans for many people has been cut off or is very limited, with the high street banks reducing the amount of money that they lend by tightening the credit criteria and making it more difficult to get a loan. This has resulted in large numbers of customers having to consider alternative specialist lenders when they need to borrow money.
The unsecured personal loan market for near-prime and sub-prime customers, also know as the bad credit loan sector, has been through some major changes in recent years. There has been some fundamental restructuring, from a time when major brands such as HSBC, Citigroup, Lloyds and Cattles plc all had lending operations serving this sector to a situation today where there are no more than a handful of lenders.
While demand for unsecured personal loans has not abated, borrowing options for these customers are now very limited. This has seen a growth in the number of people searching for poor credit loan providers and has left a significant proportion of the population under-served with so few non-prime lenders left in the market.
This presents a number of challenges. Customers that previously would have been accepted for loans of £7000 to £8000 paying an APR of around 12% to 15% are now simply unable to find loans of this type. Some customers are choosing not to borrow and deferring purchases, or if they are lucky enough to qualify for a secured loan they may opt for a larger loan. However, for those that need the money and do not qualify for a secured product, the unsecured loan amounts being offered to them are smaller and they must be prepared to accept higher interest rates.
These market conditions have also given oxygen to the payday loan sector which has seen exceptional growth in recent years. Where customers would have traditionally taken a larger loan to consolidate credit and manage their way out of debt, the lack of availability of such products has resulted in people turning to short term payday loans to cover shortfalls in their income. The risk for these customers is the rate at which their debt can build up if they do not repay the payday loan in full at the end of the month.
The internet has had a major influence on the way customers shop for loans. For those customers that are unable to get a loan from their bank, most will turn to the internet to look for one. This can be a precarious exercise if they stray too far from the more established price comparison sites and specialist lender websites. The difficultly that people with non-conforming credit face in finding a loan has also been exploited by some unscrupulous brokers, with customers mistakenly thinking that paying the broker an upfront fee will ensure they get the loan they have applied for.
When they venture online and start searching for a loan, they are faced with hundreds of offers from a multitude of companies. Many of these offers will be from businesses that will not lend them the money. These include lead generators and payday ping-trees which are internet companies that specialize in capturing customer applications and passing the data on to third parties, often to other loan brokers or payday companies. Loan brokers also advertise heavily online and offer customers the promise of finding them a product from a range of lenders. Customers searching for bad credit loans will also be targeted by debt management and claims companies.
Another risk is that they apply on a lead-generator site whose business is to simply capture customer data and pass it on the highest bidder. This can result in them being contacted by multiple companies and their credit file being searched by multiple lenders – further degrading their credit profile. The problem is that it is very difficult to distinguish between a ‘good’ and ‘bad’ website to apply to.
One of the most exciting developments in the online space is that of quotation search driven loan finding websites. Leading the way in this are companies who have developed loan search platforms that help the customer get to the most appropriate product from a panel of lenders without the customer having to make multiple applications. The real benefit for the customer is that they only receive a single quotation credit search (or ‘soft search’ that does not affect their credit score) on their credit file but are then provided with the lending decision, or a likelihood of getting the loan, for the whole panel of lenders.
By either holding the lender’s scorecard on their system and scoring the customer against this using a quotation search, or by setting up an intelligent engine that emulates the lender scorecard and doing the same, these systems are able to give the customer a definitive answer, or a high degree certainty. on whether they would be accepted by the lender for a loan.
This greatly simplifies the loan search process and removes the risk of the customer receiving multiple credit searches on their credit file. In an online environment it also helps by letting the customer see which actual lenders would be prepared to offer them a loan as well as how much they could borrow and the interest rate they should expect to pay. Given the number of people that are falling into this under-served ‘bad credit’ space, this can only be a good thing and hopefully the journey that they face when searching a loan online will become a little less perilous and much easier to understand.