The Downside of Debt

Taking out a loan is something most people have to do at some point in their lives. Borrowing can be a great way to finance a large purchase or tide you over for a time, but sometimes, debt can control you, rather you being in control of it.

If your debts are unmanageable, then life can be a struggle. Not only is it harder to take out a loan and borrow, it can also impact your life in other ways. So we’ve put together a quick guide explaining the hidden pitfalls of debt.

Credit Score

Defaulting on repayments will seriously affect your credit record; so make sure that you can afford to repay a loan.

Securing a Home

Most landlords and property agencies run credit checks, so a poor credit record will affect your ability to rent a property.

Loans and Credit

Having a bad credit record maximises the risk lenders take in lending to you. This makes it harder to borrow and you will be charged higher rates of interest on credit cards and loans.

Car and Phone Finance

A poor credit score makes financing a new car or even taking out a mobile phone contract difficult.

Employment

Some employers believe that managing money sensibly shows character, and will now refuse to take on employees with bad credit.
Finally, if you find that you are having problems, and cannot manage your repayments, don’t panic. Taking control of your debts allows you to repair your credit score and life, and there is help available. A good specialist debt advice unit can help you manage your debts and take back control.

Guarantor Lending

As banks tighten up on lending, guarantor loans have evolved to fill a gap in the lending market. Especially beneficial for those with a bad credit score, guarantor lending enables those with a poor credit history to take out a short term loan. The security offered by having a third party guarantee a loan, takes the risk out of lending should the borrower default on their re-payments. This means the borrower can benefit from more favourable terms, such as a lower APR or longer re-payment period.

A guarantor loan is an unsecured loan, and so the borrower need not be a homeowner. Most suited to those without assets, a guarantor loan offers an opportunity for those who would normally find it difficult to borrow. As students, tenants, and people without a regular income have been finding it ever hard to access loans, so the guarantor loan has become an increasingly popular option for those needing short term credit.

So who can you ask to be a guarantor? Responsible lending by loan companies typically requires a guarantor to have a regular income, with disposable income and a positive credit history. This is most likely to be a close friend or family member, who is willing and able to take over repayments if necessary. As long as they are aware of their legal obligations to repay the loan should you default, they need do nothing else to guarantee the loan. And once you get your cash, you can always buy them a drink to thank them!

Payday Loans – The Limitations

Small cash advances provided through payday lending are a form of short term loan designed to help borrowers cover expenses until they receive their wages or salary. Payday loans do have limitations dictated by their terms and conditions, and by financial regulation.

Limitations of payday loans

Payday loan limitations include:

  • Smaller loan amounts.
  • Shorter loan repayment periods.
  • Higher interest rates.
  • Emergency payday funding.
  • Proof of employment and earnings.
  • Restricted top-up amounts.

Payday short term lending is limited to small amounts, such as between £100 and £1000, with short lending terms of around one to two weeks, or longer in some cases. By law, payday loan companies must clearly state their effective annual percentage interest rate (APR), however, there is no restriction on the interest rates they may charge. Increasingly, people from low-earning backgrounds or with poor credit ratings are seeking payday loans to meet monthly expenses.

To qualify for a payday loan, the potential borrower needs to demonstrate proof of employment and earnings. Those that are unemployed are limited by these criteria. Payday loans are established with the intention of providing individuals, who cannot obtain credit elsewhere, with solutions to cover bills that are due before they receive their pay. Unlike secured short term loans, which give options in larger loan amounts with more favourable rates, payday loans achieve one purpose – the covering of emergency expenses.

Payday debts are unsecured short term loans, meaning that borrowers need not prove credit worthiness and may enter a cycle of repeat debts that compound, worsening their financial emergency status. In the UK, payday loans may be rolled over longer durations, substantially raising the cost of borrowing. Certain payday lending networks charge borrowers brokerage fees. Borrowers may be faced with limits on the amounts they may borrow or top-up via accounts online.

Where loan repayment is not made on the due date, payday lenders may attempt to withdraw the amount from the borrower’s bank account, increasing bank and loan charges. Default on payday loans may be recorded on a person’s credit history and be enforceable for a period of time under statute of limitation.

Due to these limitations and the higher costs of payday loans, payday loan alternatives – such as guarantor or secured short term loans – are becoming more popular. Secured short term loans differ from unsecured payday loans in that another person with a healthy credit history, called a guarantor, stands security for a person applying for a short term loan.

Payday loan alternatives

Keeping in mind that those who opt for payday loans generally have poor credit ratings, these individuals may not be able to get a cash advance via credit cards or use bank overdraft facilities.

Alternatives may include attempting to borrow small amounts of cash from family or friends, asking an employer for an advance on earnings, or finding a credit worthy guarantor to guarantee a short term loan. Guaranteed short term loans offer borrowers more flexibility and cost-savings in loan amounts and terms.

Peer to peer loans – the basics

A Zopa-innovated credit phenomenon called peer to peer lending has entered the marketplace to link people who save directly with those who need to borrow money, such as through short term loans.

Savers and borrowers register on a peer to peer website dubbed a kind of ‘eBay for money’. Savers are making deposits in peer to peer accounts, in order to fund retirement or a home revamp. Although deposits are not protected as in traditional bank accounts or pension schemes, peer to peer web-based accounts are offering savers higher earnings.

The way it works is that the savings deposited are spread between borrowers. On a loan amount of say £4,500, a borrower may pay an 8.4% APR, while a saver may gain 7.4% pre-tax annual interest on a deposit of £5,000.

A representative example peer to peer loan includes:

  • Pay approximately £154.26 per month over three years to borrow £5,000.
  • Pay approximately £5,553.49 after three years.
  • Charged 5.9% interest including a borrowing fee of £90.00.
  • Credit over three years totals £5,090.00.
  • Pay an APR of 7.2% totalling £463.49 interest.

Savers may deposit amounts from £10 upwards and borrowers may apply for loan amounts starting at £10. Alternative short term lending, through non-peer to peer banks and creditors, does not offer this type of minimal loan amount level with favourable interest rates.

Borrowers benefit from lower APR costs and savers benefit from higher gains than typical bank savings accounts. Even though savers are faced with the risk of having no guarantee that they will have their money returned, peer to peer loans are growing in popularity.

As an alternative to a potentially costly short term loan for bridging payment of expenses before receipt of wages or salary, peer to peer short term lending meets the needs of diverse borrowers. Peer to peer loans are not protected by the Financial Services Compensation Scheme, but Zopa is licensed by the Office of Fair Trading.

To minimise risk in peer to peer lending, peer to peer providers create £10 savings spreads between borrowers. Peer to peer loans have so far incurred minimal default and may, in the future, substantially challenge current high street banking practice. Bringing savers and borrowers directly together can reduce the cost of lending to borrowers, such as those wishing to access short term lending, and raises income potential for savers.

Setting up a peer to peer loan account

The basics of setting up peer to peer loans include:

  • Registering for a peer to peer account.
  • Getting a quick quote by entering a chosen loan amount, rate and term.
  • Lending starts at £10.
  • A current APR and quote is immediately provided.
  • To proceed with application, personal details are entered.
  • Borrowers are credit checked.
  • Within 24 hours weekday, a loan decision is granted.
  • A nominal fee is added to the loan if approved.

Peer to peer loan quotes and applications do not leave a trail on individual credit reports.

Why Responsible Lending is Important

Responsible lending of long and short term loans is important for both lenders and borrowers for varying reasons, and both have different responsibilities.

Responsibilities of lenders

Lender responsibilities extend from adhering to financial regulations to providing quality loan products and services with exceptional customer service to credit-worthy borrowers.

Borrowers require support from lenders during the terms of their loans to ensure the loan purpose, terms and repayment dates are met. Lenders, therefore, are required to:

  • Credit check potential borrowers.
  • Ensure borrowers can afford monthly, long or short term loan repayments.
  • Provide compliant loan terms and conditions.
  • Give customers clear and transparent loan information, including APR.
  • Allow potential borrowers enough time to decide on loan agreement terms.
  • Keep appropriate financial records.
  • Deliver quality borrower support and customer service.

When applications are made for new loans, lenders are expected to engage the services of credit referencing agencies to check a potential borrower’s credit history, score, and record as an indicator of their ability to repay a loan. Borrowers with weak credit worth and income may be turned down for loans, and provided guidance by the credit reference agency on how to improve their credit score.

Some borrowers with poor credit ratings, who can afford loan repayments but may otherwise be turned down for credit, may opt for a secured loan with a guarantor who stands as security for their loan repayments.

Lenders are required by law to adhere to the Lending Code, giving customers clear information about long or short term lending so that they have adequate time to consider the loan terms, conditions and APR, before making a final decision to proceed with the loan. Keeping appropriate records of all client accounts, loans and financial transactions is a legal compliance requirement.

Once a loan is agreed, lenders have a responsibility to support borrowers during the duration of their loan. Lenders follow codes of practice in this regard, particularly supporting borrowers with a history of mental illness and debt.

Responsibilities of borrowers

Similarly, borrowers have responsibilities when applying for and repaying loans and these include:

  • Providing honest information in the loan application.
  • Striving to improve credit worthiness by meeting bill payments and loan repayments.
  • Seeking further clarity from a lender where terms, conditions and APR may not be understood.
  • Taking the time to consider the loan agreement contract and affordability of repayments.
  • Contacting a lender in timely fashion if changes in circumstances impact ability to meet loan repayments.

Although short term loans with high APR and interest rates are an option for individuals seeking emergency monies to cover monthly expenses before receipt of wages or salary, opting for affordable alternatives instead of allowing costly emergency loans to roll over and further impact credit worthiness is a responsible choice.

Where credit worthiness is an issue, borrowers may wish to improve their financial circumstances through engaging family or friends in financial help, or opting for a guaranteed loan instead. Seeking professional advice about responsible borrowing and debt clearance helps borrowers to develop healthy credit history and financial status.

Why Guarantor Loans are the New Big Thing

There are a range of perspectives as to why guarantor loans have gained in popularity. Some may say that it is down to a weakening economy, a time of recession, and the need for banks to compete for borrower confidence.

The needs driving the guarantor loans trend are basically two-fold:

  • Lenders are required to deliver responsible long and short term lending practices, including loan products and services.
  • Borrowers need to have the means to improve their credit worthiness for borrowing opportunities.

 

Responsible lending practices

By law, lenders are required to act responsibly in advertising loan products, offering long or short term loan quotations, and throughout the application and borrowing process. Credit worthiness checks through credit reference agencies to ensure that potential borrowers are able to afford loan repayments, is a requirement.

Similarly, lenders are legally bound to have to provide borrowers with transparent APR for all loans, clear information about loan terms and conditions, and all loan costs. Lenders are expected to take due care where borrowers, or potential borrowers, have mental health conditions that may impact their debt.

Part of responsible lending practice is providing options in loan products to meet the diverse needs of borrowers. Having loan product and cash advance alternatives not only improves industry competition and innovation, but allows the right product to be matched to the loan needs of the borrower.

Guarantor loans are secured short term loans and are an example of how lenders can provide responsible alternatives to individuals with weak credit history, who may be disadvantaged from taking out multiple emergency loans or rolling bridge loans.

 

Improving credit worthiness

Guarantor loans require an eligible credit worthy individual to stand as guarantor for the short term loan. These individuals stand as security in the event that the borrower defaults on loan repayments. Individuals with weak credit histories, such as a young student, may benefit greatly when a parent or relative serves to guarantee their short term loan.

Guarantor loans enable individuals to obtain suitable cash advances with favourable duration, interest rates and repayment terms. This type of credit offers such people a chance to improve their circumstances and financial status or credit worthiness, while gradually repaying the short term loan.

The opportunities that guarantor loans may be used for include education, business development, or purchasing a car. This use of secured credit enables individuals to develop themselves and their future earnings potential, while lowering financial strain. Some people use guarantor loans to consolidate their financial circumstances and gradually make repayments at an affordable pace.

 

Finding a short term loan guarantor

Being a guarantor for a secured short term loan is a means of helping someone to improve their circumstances without having to give them money. Family members may lend a hand, or friends may step in to vouchsafe the loan. Employers or others in the community may offer such support. Seeking a trusted person to agree to be a guarantor, and gaining professional guidance, will help potential borrowers to understand their credit responsibilities for successful, secured borrowing.

It can be difficult trying to find somebody to secure your loan, which is why PiggyBank offer loans without guarantor of up to £1000. Our online application is simple and can be done on your mobile, apply online today!

The power of short term loans

As with long term loans, short term loans are powerful in meeting the diverse personal and business needs of borrowers. Lenders create different short term loan types for this purpose, and for developing investment potential and market competition.

The strength of short term lending

Short term loans take on varying forms and may include:

  • Money loans from friends or family.
  • Credit through store or bank cards.
  • Bank overdraft facilities.
  • Payday loans.
  • Instalment loans.
  • Guarantor loans.
  • Peer to peer loans.

Borrowing money from friends and family may be the most economic means of lending, however, not all individuals are in a position to have this type of opportunity. Weighing the cost of credit card charges for cash advance amounts and durations is important, as other short loan instruments may be more viable.

Bank overdraft facilities may depend on credit-worthiness and account history. Those with a weak credit history may not be privileged overdraft facilities and may seek cash infusions elsewhere. Emergency or bridging loans provide cash to meet monthly bills due before wages or salary are received. These loans may have high interest rates and charges.

Those with high credit-worthiness may be able to obtain bank loans with favourable rates and terms easily. Those, however, who lack credit history or have weak credit worthiness, may not be eligible. PiggyBank offer bad credit loans intended for people with a poor credit history, meaning you can cover an unexpected expense quickly and conveniently. There are other types of bad credit loans such as guarantor loans— where a credit worthy individual stands security for the loan agreement are a means for these individuals to receive the loan monies they need.

Peer to peer loans are a new social lending mechanism linking savers and borrowers directly. Savers deposit amounts that are spread between borrowers. The borrowers pay a lower APR and savers receive higher interest earnings.

Whatever form the short term loan takes, there are certain common aspects, such as:

  • Quotation and APR.
  • Loan terms and conditions.
  • Interest rates and charges.
  • Loan amount and duration.
  • Repayment type, amount and frequency.
  • Credit worthiness checks.

A personalised short term loan quotation from a bank or credit institution is generally listed as an entry on one’s credit record. The same is true for short term loan applications. This is not the case, however, with peer to peer loans.

By law, loan APRs should be clearly advertised. The loan APR for the amount and duration, and any additional charges, makes all the difference to how interest compounds and the final total amount of monies repaid for borrowing. Requesting a breakdown from the short term loan provider enables thorough comparison of short term loans on the market.

Extending a loan’s repayment duration, lowering monthly repayment amounts, or defaulting on repayments during the course of the loan can raise loan costs.

Comparing loans to maximise loan benefits is crucial. The power of short term lending rests in the right type of loan, matched to a person’s circumstances or business needs. If you’d like a loan product to be found for you, consider applying through a broker for an online loan with a direct lender.  Ultimately, keeping loan costs down and using the loaned money as a foundation to improve future earnings potential, is a means of empowering financial strength.

Every cloud has a silver lining

In a previous article I talked about how PiggyBank had opted to use Rackspace’s cloud for infrastructure hosting. Since then we have been steadily progressing towards the launch of our short-term loan product and along the way we have started to use other “cloud” based products.
This got us here at PiggyBank HQ thinking about some of the more serious topics that pop up in established businesses. For a group of entrepreneurial youths we thought this was very grown up and wanted to share our thoughts with you.

 

Business Continuity & Disaster Recovery

 

Business continuity and disaster recovery attempt to answer the question: “What would happen to our business if…”. The end of that question could be:

“… our server stopped working”
“… we lose our source repo”
“… our building gets hit by a meteor”
“… the power goes out”
“… we get struck by the zombie apocalypse” (maybe not this one, albeit a fun ‘what if’ discussion)

So we asked ourselves these questions (and a few more) and we decided that if these things were to happen we will be able to get our business up and running quickly, with minimal disruption and more importantly reduced loss of business. For big organisations, employing lots of staff and big hardware overheads these occurrences are very difficult and expensive to deal with. So why do we think we are prepared for them?

 

Infrastructure Recovery

Because we are using Rackspace’s cloud we can create new servers in about 30 minutes, and because we are billed for these by the hour we use we can spin up a new box when we need it and not incur cost.

Rackspace also have a cloud file system that we use to store server images and database backups. This means that if one of our primary servers encounters a problem or our database is corrupted, we can recover both from the cloud on demand.

 

Business Recovery

Everything we do here at PiggyBank HQ lives in the digital realm. From our project plans, our development plans to our business files, emails and collaborative documents. If there is ever a problem with our workspace or the utilities that support it (electricity, internet) all we need to do
is pick up our laptops, find an Internet connection and business continues. We could literally be at opposite ends of the planet and still be able to continue on with business.

When teams are small and agile this is a reality. Large teams may find this more difficult to achieve.

Here are some of the tools we use to enable this:
Basecamp – This is where we organise our projects, who is doing what and when Trello – Another project management tool, we use Trello for our Kanban process
Dropbox – File sharing system
Google Apps – Email, collaborative documents, calendars, etc
BitBucket – Distributed version control using either Git or mercurial repos

 

So the key is… Distribution!

 

We have been fortunate to find tools early on in our startup journey that complement our agility but also provide us with resilience and piece of mind and knowledge that in the event of a disaster, like a phoenix, we will rise up again. The key to this goes back to the saying “don’t put
all your eggs in one basket”. Organisations can spend millions of pounds setting up resilient architectures and infrastructures that can withstand disaster. We have distributed our business activities into the cloud on a small budget, in some cases for free.

If you are in a position of thinking about setting up a tech startup or you are in charge of IT in your company, have a look into what you can do.

Happy coding and see you soon.

P.s. In the event of a zombie apocalypse, what would be your chosen weapon?

Unnecessary Wastage

One of my biggest bugbears as a CEO of a small company like PiggyBank is wastage. Being a start up, we don’t have huge pots of money like a big corporate. So every pound really does count. This means that we are incredibly focused on efficiency, accounting for time and making sure that every minute that we are working is productive, effective and focused.

In house we keep meetings to an absolute minimum, don’t send pointless emails and use productivity and time management tools like Basecamp, Trello and shared documents to help keep collective focus.

So when situations arise, totally out of our control, which cause us to waste time, I get very frustrated. My big frustration at the moment is the lack of uniform display standards around the different browsers.

Why do certain elements of our site look different in Firefox for Windows and in Safari and in Chrome and in Firefox for Mac etc? Why are there not uniform standards across the board?

Although I’m not a techie, I do have a pretty good knowledge of what the technical community as whole is like. Although this will make me a little unpopular both internally and externally, techies can be difficult. They know what they like, they know their methods and they are reluctant to change for anyone. Want to see what I mean, get a .net and a PHP developer in a room with a brief to produce a website, and listen to them debate. Wow…

The only reason I can see for the difference in standards is because of stubbornness; every team thinks their way is the right way.

Below are the latest browser stats for Browser usage in the UK from W3 Schools:

2012 IE Firefox Chrome Safari Opera
July 16.3 % 33.7 % 42.9 % 3.9 % 2.1 %

Here at PiggyBank, we are great believers in the 80/20 principal. Therefore we decided to not support IE 6 or 7, Firefox 11 and below and Chrome 18 and below because of the relatively small usage. And the only reason we are so conscious of Safari performance is because our board all use macs, plus the huge iphone and ipad usage, so it needs to look good.

But even with this decision to only support relatively new browsers, we still encounter cross compatibility and styling issues.

To understand the scale of this problem, we have been measuring the amount of time we have spent fixing cross browser issues over the past 20 working days. We have found that 27 hours of the past 600 collective hours have been spent fixing cross compatibility bugs. This equates to 4.5% of our developer’s and designer’s time.

4.5% on something that is avoidable!! Scary statistics.

And this is just for one tiny tech start up in a small town in Hampshire. What are the wastage stats for the whole of Hampshire? Or the whole of the UK? Or the whole of the World? How much time and money is being wasted on development and design resource to fix these cross browser issues? Think of how much more time could be spend on innovation and pushing digital forward if the top four browsers agreed on uniform standards across the board…

I genuinely believe that what is perceived by designers, devs and marketeers as a mild annoyance, is seriously hampering the future development of the technical industry and must be hampering the speed of growth for online.

Every CEO, business leader and senior manager should be asking ‘why’? Why are we having to spend so much time on this? Why is this avoidable issue costing my business money? Why are my team having to cross browser check when they can be making my site better?

But for some reason, they aren’t asking ‘why’. This wastage is seen as par for the course with web development.

But why is that?!

So Mozilla, Google, Microsoft and Apple, over to you.

An Average Household Lacks £1,496 a Month

The average British household needs £1,496 more each month, after tax, to feel financially secure, according to a survey by uSwitch.com, a price comparison website.

By polling people on the costs of their housing, food, travel, additional expenses and so on, the website came up with a figure of £4,000 of after tax income each month for a household to cover all of its debts and still be putting aside enough money each month to feel financially safe. However, the same survey revealed that most households were only bringing in £2,504, meaning that each household needs an additional £1,496 every month to feel truly financially secure.

The problem has arisen because living costs have gone up far faster then wages. Energy, petrol and food are the big ones, which each increasing and taking a larger and larger chunk of household budgets.

Michael Ossei, uSwitch’s personal finance expert, spells out the problem: “Years of pay freezes and the rising cost of living have hit consumers hard and led to a financial nightmare where they are now almost £1,500 a month short of the household income they need to be secure […] it’s unlikely that things will get better quickly – with few people expecting pay rises, the majority of homes are unlikely to see any rise in their monthly income, let alone the sort of increase they feel they need.”

So it seems that we can expect these problems to continue into the future, and that many households will simply have to cut back on their spending or abandon their hopes of achieving what they believe is financial security.

However, some good news has come from the survey. Over a third of people defined financial security as being free from debt, which may be an attitude they carry with them out of the current economic down turn. If that is the case, we may end up with a much healthier financial landscape when all this is over.

For a payday loan or short term loans, contact us for more information.