Will Short Term Loans Stick Around for Good?

Short-term loans are often considered controversial. They are quick and easy to access, as well as being available to people with poor credit, but also tend to carry extremely high interest rates and other charges.

Despite mixed opinion, it is impossible to deny how much the market for short-term loans has expanded in recent years. One of the most common forms of short-term credit, the payday loan, has exploded in popularity. While experts say there are no firm figures to quantify this extremely rapid growth, they have all noted that the sector is continuing to expand.

Much of the popularity of short-term loans comes from their accessibility. Often they are provided by online companies who ask little more than some basic details and that you hold a bank account with a debit card. Crucially, they are also available to people with a less-than-perfect credit record.
But will this expansion continue? Ten years ago, short-term loans were something that were associated with certain sectors of the public, particularly low-income families and those on benefits
or with a limited earning potential. However, people of all ages, from all backgrounds, career paths and education levels are starting to consider short-term loans to be a viable credit option.

Much of this is related to the extreme financial changes the country - and indeed, the world - has gone through in recent years. The credit crunch and subsequent recession put us in an economic situation that we had not seen for more than 70 years.

After an extended period of 'boom', where house prices and levels of consumer spending soared through the roof, we crash-landed into an economy of 'bust', which saw severe contraction, a significant reduction in the availability of credit, widespread redundancies and a spike in mortgage foreclosures.

It is in these circumstances that we saw the rise of the popularity of short-term loans. People who had never experienced financial hardship before - middle-class families and high-flying professionals - found themselves struggling to pay the mortgage.

Redundancies weren't largely confined to the traditional labour sectors, such as in the recessions of the 1970s, 1980s and 1990s. As well as retail and construction workers, specialist engineers, highly experienced academics and private sector executives were finding themselves without work. And those who were spared redundancy were often put on reduced hours or limited income. A whole new generation and demographic of people were facing financial difficulty.

Many people also found themselves with damaged credit scores as a result of mortgage, loan and credit card defaults. Faced with constricted credit and a shortfall in income, more people began to see short-term loans as a choice that could work.

This appetite and acceptance of short-term, high-interest loans is directly related to this economic upheaval. Lenders are providing for a gap in the market between traditional, long-term credit solutions, which are harder to access, and customers that need quick access to cash to cover unexpected expenditure.

It is fair to say that the popularity of this loan will continue for as long as the economic uncertainty does. While banks and other lenders continue to be cautious and restrict the availability of more affordable credit, people will look for other solutions.

Of course, there is the issue of whether short-term loans are being used in the way they were designed, or whether more vulnerable people with deep-rooted financial difficulties are using them due to the ease of obtaining short-term loan cash. This is understandably a worry and something that the Office of Fair Trading is investigating in regards of payday loans.

Short-term loans have established themselves to a degree where they will never completely disappear. However, as the economic situation stabilises in future, it will likely lead to a fall in demand for short-term, high-interest credit.

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