Payday loans could overtake cards
"Mainstream lenders need to aware that what may have begun as a last resort, could be an enduring relationship," one expert warns.
Growth of payday loansIn the report, Precious Plastic 2012, Simon Westcott, director at PwC, said payday loans were increasingly on borrowers' radars: "Consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers.
"As these providers become more conventional, we are likely to see them venture further into the mainstream market with their own credit card, longer term loan products or even current accounts."
In December, research by insolvency trade body R3 showed that 3.5 million adults were considering taking out a payday loan over the next six months.
The downsidesPayday loans have attracted a barrage of bad publicity. Consumers need to know that while these short-term loans can be very convenient, they come at a high cost, especially when debts are rolled over for long periods of time.
Payday loans are designed to tide people over until they receive their wages. The average size of a loan is £300, and two thirds of borrowers have a household income of less than £25,000, according to watchdog Consumer Focus. Charges typically range from £13 to £18 in interest for every £100 borrowed, but can be as high as £30 per £100
Credit cards declineSo given the charges and the risks, why are we so keen on the loans?
Westcott explains: "45 years since it was first introduced, the credit card is suffering a midlife crisis. Consumers discarded nearly one million cards in 2011, taking the number of credit cards in circulation down to levels not seen for almost a decade. The longer term trend suggests that numbers will continue to decline, with the younger generation showing a preference for debit cards and emerging digital alternatives such as mobile payments."
This may be disatisfaction with the charges and interest, or the fact that so many people are unable to get their hands on the best deals.
Borrowing continuesWhat is certain is that Britain's love affair with borrowing continues. PwC warns that UK consumers are among the most indebted in the world. The average UK household is saddled with nearly £8,000 of unsecured debt, even though borrowing levels have fallen for three years. The average credit card balance amounted to £1,000 last year. Amongst 25 to 34-year-olds, a quarter admit to using credit to fund essential purchases.
If we are turning away from credit cards, the worry is that we may head into even more alarming new territory.