Credit History in the UK
Credit History From Hawala To Payday Loans Online
‘Neither a borrower nor a lender be’ says Shakespeare in the iconic play Hamlet. These may be very wise words, but in today’s modern society, most people use credit of one form or another. The UK’s credit history goes back for hundreds of years. Even working for an employer is a form of credit. You are providing your services but don’t receive your money for them immediately. There have always been formal and informal loans, borrowing and gifts of money in return for services.
Credit history stretches back to bartering, the Hawala system, promissory notes (IOUs) and has taken many different forms along the way. Mortgages, bank loans, car loans, hire purchase agreements, credit cards and even the tab at a local shop or pub are all forms of credit. Here we explore three of the largest revolutions in the UK’s credit history.
The begining of our credit history begins with Hawala. Hawala is an ancient method of lending money that has been used for many years. There is no written contract between Hawala brokers and their customers. Instead, the system is heavily based on trust. What are the origins of Hawala and how has this ancient form of credit evolved into the new products of online payday loans?
The basic principle of Hawala translates as ‘Trust’. It is a means of transferring money without physically moving currency in the form of notes or coins. It is mainly in operation in Arab countries and South Asia.
Credit Network of Trust
The Hawala system requires two brokers for each transaction. The sender uses one broker the receiver uses another. Hawala begins when the person sending the money contacts a local broker and specifies a password that the receiver uses to release the funds. This broker then contacts the recipient’s broker and advises him about the password. The person who is to receive the funds also knows the password. Once he has informed the second broker what this is, he can have the funds. The two brokers receive a small commission for each transaction.
That’s the whole process. There are no written contracts and no need to produce any forms of ID. Commission rates are low as Hawala relies on trust and honour. Brokers keep track of debts and sometimes settle them by offering goods or services in lieu of cash. Hawala is an alternative system that runs alongside established banking practices in countries where it has operated successfully for many years.
Hawala in Modern Times
Even at the start of our credit history, before the invention on modern credit and online loans, Hawala had been in operation for many hundreds of years. It is a legitimate form of banking in some countries. But understandably, governments do not like this form of credit brokering. There is no way of keeping track of income or taxes that may be due on money that has been transferred by this method. The system has been declared illegal in some countries, such as the USA. This is a result of government bodies trying to cut down on money laundering issues. Furthermore, the ban on Hawala is for our security to prevent terrorist groups from receiving funds by this credit system.
So, how has this ancient line of credit evolved into the latest online payday loans that are now offered by hundreds of companies in the UK?
Credit History – Victorian Times
When times were hard during the Victorian years, there were many people who used credit to pay for their food. Some of those who were more hard up ended up in a debtor’s prison. This led to many families being put into the workhouse and subsequently owing money for the rest of their short and miserable lives. Thankfully, jail is no longer a legal punishment for owing money. Although using credit has helped to grow and sustain the economy, in recent years, there has been a massive increase in lending that has seen an unprecedented amount of people get into serious debt.
To understand the nature of how the modern credit sustained society we have to look back into the credit history at a time when most people lived off the cash that they received as a weekly or monthly wage. During the 1940-50’s in the UK, there was virtually no such thing as credit for the working classes. With the exception of a few companies like the Prudential which loaned money against a life insurance policy, credit for the working classes was almost impossible to attain. Local shopkeepers would allow families to have goods and settle their bill at the end of the week when their pay arrived but overall, most people had to save up for consumer items.
A Credit History Revolution
Things changed radically during the 1960’s. This was a period when there was full employment and consumerism took off in a big way. Suddenly you could buy goods on a hire purchase agreement. This meant you could have the goods immediately, but pay over a specified length of time. This could be 6 months, a year or even two years. There were some restrictions however. Initally, only someone over age 21 could take on a hire purchase agreement. Furthermore, you had to be male. Some companies would only allow house owners to sign up for this form of credit. But gradually companies began lifting restrictions as businesses could see profits taking off massively.
A mortgage was another form of credit that was restricted to mainly men during this period. Furthermore, the criteria for obtaining a mortgage were very strict. You needed to give a deposit before you could get a loan. Additionally, you could only borrow an amount equal to two and half times your annual income.
However, as women were making inroads into the workforce, it was sometimes possible to allow a little extra against their income. In the main, however, women were expected to leave work to bring up a family and were not deemed creditworthy in the long term. So, credit during the fifties and early sixties was mainly allowed only to buy a home or to make purchases of furniture or electrical goods. No one would have entertained the thought that they could pay for a holiday or any other form of entertainment by credit.
The Birth of the Credit Card
The Diners Club Card was the first card to be used as a method of payment. The card was introduced in 1950 and was allowed to be used in a few restaurants in New York only. This was one of the most influential ideas that changed the face of society. It was soon followed by influential change in credit, triggered by Barclays Bank. Barclays introduced the first credit card into the UK. Launched in June 1966, Barclaycard was the forerunner to all of the credit cards that are in use today. Although credit cards were already being used in the USA, Barclaycard faced incredible opposition in the UK as this type of payment was seen to be associated with ‘undesirable American influences.’ It was thought that it would lead to rampant inflation, as people would be tempted to pay for things they could not afford.
The credit limits set by Barclaycard were low and again, it was necessary to fit strict guidelines before you were granted a card. When paying off the amount owed, you could choose to pay all or a small percentage of the debt and roll the rest of it over to the next month. A massive advertising campaign helped to sell the idea of a credit card to millions of people. Eventually the card was used for the dual purpose of a credit card and a cheque guarantee card. Suddenly, there was money for luxuries, and you didn’t have to save up anymore. The age of instant gratification had arrived.
Credit History of Credit Cards
Barclaycard was swiftly followed by a series of other credit cards, including the now defunct Access card which was swallowed up by Master Card. Other charge cards like American Express have a different set of regulations. These cards have no limit, but you do have to pay them in full at the end of each month. Businesses became the biggest customers for the American Expres. Thy used them for their employees to charge expenses, but has since become more common for personal use too.
Once banking regulations were relaxed, many banks brought out their own credit cards and now, there are hundreds of different cards each with their own set of regulations, interest rates and minimum payment requirements. There are a host of money comparison websites where you can look at all the different cards on offer to see which is the cheapest. As companies attempt to get a majority share of the business, there are special offers that charge 0% interest for a year, but beware the administration fees that often accompany these deals.
The Start of the Credit Crunch
During the late 1990’s, banking regulations were relaxed in a big way. Banks began to increase the limit on credit cards without any consideration of whether customers could really afford the amount they were borrowing. Personal debt rose to unsustainable amounts. Inevitably there was a financial meltdown that came to a head in 2007.
The global 2007 ‘Credit Crunch’ hit, the worst financial crisis since ‘The Great Depression’ in the 1930’s. It affected the UK remarkably, and society is still trying to recover. However, the world learnt a valuable lesson that year, and ever since, financial institutions have been working to improve the quality and suitability of their services to avoid another economic meltdown.
With the growth of Fintech (financial technology), many financial services that were previously only accessible on the high street are now available online, from the comfort of your own home. Customers now manage their finances online without going into a shop front or dealing with bank tellers. Payday loan companies cashed in on the growth of technology to allow users easier access to their products. Easy to use online forms allow users to apply for a payday loan with speed and efficiency, allowing the funds to arrive in their account within hours of when the need for extra cash materialised.
What exactly is an online payday loan?
Sometimes called cash advances, lenders grant online payday loans for a short term. They are a form of unsecured loans. i.e. there is no requirement to pay back the loan using any assets such as a business, house or a car. The purpose of payday loans online is to provide you with extra cash to tide you over until your next payday.
For many people, the existence of payday loans online can prove to be a helpful means of getting through a short term financial gap. As long as the terms and conditions of the loan are fully explained and understood, payday loans online can be the right way to go. The main aspect that you should consider is whether or not you can pay the full amount when it is due. Failure to do this could mean spiralling interest costs that quickly add up to a much higher amount than the initial amount borrowed. A reputable lender will always consider whether or not you can really afford to borrow the amount you need. They will also explain exactly how they calculate the interest. Furthermore, they will advise you about any administration fees and will make sure that you understand the consequences of non-payment when you reach the due date.
Regulation of Payday Loans Online
There are some rules that apply to payday loans that are similar to bank loans. Companies must publish the APR (annual percentage rate) of interest but, when first introduced, there was no limit on the rate of interest that they could charge. As long as the person applying knew the rate being charged, that is all that was required. Some companies charged excessive rates. This led to criticism by the financial industry and other organisations. Campaigns against payday loans led by Stella Creasy, a Labour MP complained that payday lenders were exploiting vulnerable people by charging excessive rates of interest. In addition, there had been concern that many people did not understand how easily the debt could spiral out of control if the due payment date passed without the full amount of the loan being paid off.
Companies which offer payday loans online need a Consumer Credit Act license. There are regulations about how payday loan advertisement. There are some comparison websites where you can go to look at how the companies match up to each other. The newly created Financial Conduct Authority which has taken over from the FSA (Financial Services Authority) is in the middle of making some major changes to ensure that customers do not find themselves in a spiralling debt situation that rapidly becomes unmanageable.
One of the radical changes that have been made with the introduction of the Financial Conduct Authority is that all companies that offer financial services require a new lending license to continue operating. Western Circle trading as Cashfloat holds a full FCA license that allows us to offer consumer credit in the UK. Like the rest of the credit industry today, Cashfloat is implementing stricter compliance rules to ensure safe borrowing for UK customers.
Credit History And The Competition And Ethics Of Lending
There is a great deal of competition among online payday lenders with many unscrupulous companies vying to get the most trade. If you just Google ‘ payday loans online’ you will get results that offer loans with no credit checks, loans for people on benefits and loans for people that have a bad credit history. Companies which offer this kind of credit are not doing anyone any favours and usually charge the highest interest rates, as they are taking on a high risk of non-payment. The rewards for this are vast, but the profits that are made are at the expense of vulnerable people who are desperate for a short term loan to get them through an unexpected crisis.
However, there are reputable companies that look at affordability and limit the amount of times a you can roll over a loan. They also put a cap on borrowing. The Financial Conduct Authority has had a great deal of input into making sure that companies only lend to those who can actually afford to borrow. Additionally, the FCA in in the process of enforcing regulations that will make sure that borrowers fully understand how much the loan will cost and the consequences of non-payment.
Credit History to Online Loans
If you are thinking of approaching a company that provides payday loans online to help you get through a sticky financial patch there are a few points to consider before you make the application. If possible, try to find an alternative solution. Family and friends may be able to help for a short term money crisis. If there is no other way and you want to apply for payday loans online, there are various things you need to consider. These include the rate of interest, exactly how much money will have to be repaid and any administration fees. Also make sure you can meet the deadline payment date and try to borrow as little as possible.
Remember, one person’s line of credit can easily become another person’s burdensome debt. A reputable online payday lender will only allow you to borrow money if you can afford to make the repayment. By finding the right company to deliver your payday loans online, you will be able to get through your short term financial crisis and come out the other side with no long term debt.
Payday Loans Online is a purchase of money
Payday loans online are products, just as a car is a product. Contained in the word “product”, are also services that we receive. For example, annual checks at our dentist are some kind of product. In fact, you can consider everything we pay for as a product. In the case of payday loans online, it might be a little more confusing, because once a deal is struck, we receive money instead of paying money – as with any other deal.
However, if we look a little deeper, we can see that payday loans online certainly meets the criteria of being a product. We actually buy the possibility to use money that we don’t possess, for a limited amount time. The price we pay for this product is an additional amount we have to pay, beyond the amount we received. In financial jargon, we call this ‘interest’, which is actually payment for the product called a ‘loan’.
Yet we can think that the “purchase of money” (ie:‘A loan’), as being different from other products. We do not particularly worry about the ‘quality of the money’. In order to demonstrate this, let’s suppose we get the loan in actual cash, and not in the form of a bank transfer, as is the usual way loans people receive loans today. Of course this scenario is not realistic, but for the purpose of the example, let’s imagine this is so. Theoretically, would it be important to us if the banknotes would be of twenty pound notes, or of ten pound notes? Would it matter if the banknotes were new or old? It would not matter at all. Money is money, after all.
What is Short Term Loan Quality
Still, a loan has “quality”. This is not reflected in the quality of the money we receive, but rather, in a more indirect way. The quality of a loan is demonstrated by the level of service we receive from the institution that we deal with. A high quality loan will be recognizable, for example, if the customer receives all the information he needs clearly. It would also mean that there are trained professionals at the client’s service when needed. It is very important that the institution giving the loan treat the client fairly, and that there is no advantage taken of potential customer ignorance regarding complex financial issues.
This can be thought of as similar to the purchase of fuel at a gas station. Let us assume that the fuel is pure and not mixed or fake. One of the factors that would influence our decision whether to go to a specific gas station, is the quality of service in that station. Is the toilet maintained and cleaned? Is the service attendant polite? Lastly, does the gas station act fairly with the customer by correctly calibrating the gas counter?
So far we have not mentioned the price issue. But of course, the price of the product is one of the main deciding factors when choosing a specific product. In the case of a loan, the interest rates represent most of the price we pay. But interest is not the only factor. There are lenders that will charge you for ‘file opening costs’ or anything else, fit to their imagination. So while comparing offers, you have to pay attention to whole picture.
Payday loans online as a product – Summary
So, why do we need to know about the UK’s credit history? Like with any product that we intend to buy, the more we learn and understand about it, our chances of buying a product fit to our needs grow. When we intend to buy a car, we will do our best to learn and understand the different technologies related to the engine. We will study the subject of various instrumentation in the car, and more. This is true, of course, also while there is a need for a loan. The more we learn and understand about credit history, we decrease our possibility in making mistakes, and choose the right loan for us in a way that will match our needs.