Payday loans overtaking credit cards as loans of choice

A report published by Price Waterhouse Coopers suggests that instant cash loan and short term loan companies may soon be overtaking the use of credit cards by consumers in addition to other forms of competition such as digital payments, the use of debit cards and mobile phone payments.

Credit cards were reportedly facing a “middle aged” crisis as their traditional users were finding that the alternatives provided a better and more readily available service in many respects.

The market for short term loans companies is certainly a big one with the average household in Britain owing nearly eight thousand pounds, despite some unsecured debt being paid off during 2011. Although there are no official figures that are able to document the rise in short term loans use, a separate report described the growth of short term loans companies as “phenomenal”.

The number of credit cards and the amount of borrowing using credit cards both dropped in 2011 with the use of debit cards on the other hand increasing by 10% and many younger people in particular turning to the use of mobile devices and digital payments.

The tighter credit card lending criteria appears to be one factor driving many people towards short term loans providers as an alternative, despite the fact that interest payments on these loans were many times higher than those charged for credit card borrowing. Price Waterhouse said that the temporary shift to these new high cost lenders might become more permanent as borrowers become accustomed to the easy availability of short term loans.

A separate report by Ernst and Young confirmed the finding by PWC and suggested that the trend towards using short term loans was particularly prevalent amongst poorer borrowers, traditionally those who found the most difficulty in securing other types of loans including credit card loans.

Neil Blake of Ernst and Young, said that it was those borrowers who fell outside the credit criteria of the main lenders who were turning to the readily available short term loans and it was unlikely that this trend was going to revert any time soon as most banks were tightening their lending criteria.

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