Payday lenders, store cards, doorstep loans; almost half of us are now in debt to non-traditional lenders, according to a new study.
New research from the Debt Advisory Centre has revealed that more than 45% of us have non-traditional debts.
Non-traditional finance options can come in the form of store cards, hire purchase plans, doorstep loans or credit union loans. Otherwise, it can include items bought on credit, 0% finance/'buy now, pay later' deals, and paying for purchases in weekly or monthly instalments. Nearly a quarter of respondents revealed that they use credit to pay for items bought online or from catalogues, making it the most popular form of non-traditional borrowing.
Breaking down the options
Non-traditional lenders offer alternatives to bank loans, overdrafts and credit cards. Here are some of the ways in which people can accumulate debt:
Store card – Acts like a credit card, but you can only make purchases at a specific store with it. Often come with an offer of a (possibly introductory) discount scheme, but charge high interest rates. 15.8% of respondents with non-traditional debt had used store cards.
Hire purchase – A product is hired while the purchaser makes instalment payments against its value, until the full value has been paid. The lender may repossess the goods if payments aren't kept up. It is illegal to sell the item(s) without permission from the retailer. 13.4% of respondents had this kind of debt.
Doorstep loan – A type of personal loan, often for a small sum of money, where an agent will come to your house to collect the instalments. The interest rates are often extremely high. 5% of respondents had this kind of debt.
Credit union loan – A credit union is a collective of members who might belong to the same profession, live in the same town, or have another common denominator. Members pool their money so that they can offer loans at a low interest rate, to the benefit of all involved. 4% of respondents had this kind of debt.
Why is this type of debt so prevalent?
Debt Advisory Centre spokesman Ian Williams pointed to the recession making it harder for many to get normal forms of credit.
He said: "Where you might've been offered a credit card before, you weren't, because your credit rating was a bit marginal. Then some of these other routes became more attractive."
Rather than heading to the bank to apply for a personal loan or credit card, more 'direct' ways to obtain items, such as picking up a store card (which are easier to get hold of) became appealing.
Store cards are particularly popular among young people, with 26.4% of respondents aged 18 to 24 using them, whereas only 6.2% of over-55s had one.
What are the problems?
The biggest problem with non-traditional debt is that it quickly snowballs.
As Williams explains: "Where [many people] get into trouble, are those little loans that you may not even notice that you're taking. You buy £30-worth of clothes from a catalogue, and you don't pay it off in full, then you pay another £30. And before you know it, it's mounted up. When clients come to us looking for debt advice, it's very common to see multiple catalogue debts on their credit files."
Of those surveyed, it seems that a significant proportion were having difficulty keeping up with their debts; 40.4% of those paying in instalments were at least a month behind with repayments, while 35.8% of those with store cards had also fallen behind by at least the same period of time. 43.5% of doorstep loan customers were at least one month behind, while 15.2% were two months or more behind.
What do you think about non-traditional finance options? Are they too freely available? Are the interest rates simply absurd? Tell us what you think in the comments box below.