For years, the high-cost short term loans (HCST) industry has been subject to criticism in the UK. Otherwise known as ‘payday lending,’ the sector has attracted criticism from the press, religious figures and members of Parliament.
This type of finance often carries an interest rate above 1,000% APR and is used by some of the most vulnerable in society. This includes the 8 million Britons who are considered to have poor credit, according to Payday Bad Credit, and often find themselves pay cheque-to-cheque and unable to get out of a debt spiral. These loans are often used for emergency purposes, paying rent and keeping up with bills for living and car repairs.
However, the UK’s thriving Fintech sector is seeking to offer low-cost alternatives, as highlighted by the start-ups below.
Wagestream allows staff to draw down a percentage of their earned wages any day of the month for a flat £1.75 fee. Instead of employees having to wait until payday or the last working day of the month to get paid, they are essentially able to access it upfront for a small fee. The low cost and flexible arrangement mean that Wagestream able to ‘restore the right balance.’ The company has raised £15 million in investment funding earlier this month.
This startup also approaches the need for high-cost loans from an employer’s perspective. The London-based firm offers software as a service for employers to offer flexible credit facilities to their staff at very low rates, whilst providing financial education to its users too. This is designed to help employers and their staff to stay on top of their finances and promote good financial wellbeing. The company also provides investment and saving opportunities for individuals to maximise their income.
Whilst not addressing high-cost loans directly, Canopy allows tenants to improve their credit score upon making successful rental payments each month. This is the first company in the UK to offer this service and tenants have previously been unrewarded for keeping up with their rent – although the nature of making regular repayments is something that is weighted heavily by prospective lenders.
However, a partnership with credit reference agency Experian enables the customer’s repayment data to be shared and updated to improve their credit score. The ability to have a better credit score allows borrowers to access lower and more affordable rates for personal loans and financial products such as credit cards, rather than resulting in high-cost loans. In fact, a credit card facility can be zero per cent interest as part of an introductory, rather than having to pay over 1,000% for a payday loan.