Failure to gather information and shop around for cheap credit are the tell-tale behaviours of savers who resort to high-cost credit deals, according to new evidence just released by the Office of Fair Trading (OFT*).
The high-cost credit specified includes pay-day loans (loans lasting just a few days), in-store finance options such as hire purchase, home credit, mobile phone text loans, credit union loans, pawn-broking, and rent-to-buy arrangements.
Certain behavioural patterns are associated with borrowers who burden themselves with these high-cost credit loans.
These tendencies include:
- Rushing the decision: tendency to decide in just a few days what borrowing option to use
- Failure to shop around for other forms of credit
- Failure to take advice or obtain information on product types
- Choosing a product which provides quickest access to money
The OFT also noted that consumers have expressed problems in understanding annual percentage rates (APRs) which dictate the longer term cost of borrowings. This hampered their ability to compare various loan products.
A significant increase in the number of providers of payday loans in the UK during 2009 was noted by the OFT as a symptom of the recession.
The international scene gives further clues about the growth of high-interest lending, showing that this less prudent savings mentality also seems to be widespread in Anglo-Saxon markets.
While payday lending has also flourished lately in the USA, Australia, and Canada, it has failed to take off in the very conservative German savings market.
*Source: ‘High Cost Consumer Credit’, emerging evidence from the OFT review, December 2009
