Daniel Tannenbaum is a London-based consultant who has been working in consumer finance in the UK for over 10 years. This is a sponsored post by Tudor Lodge Consultants.
For many Britons, the festive season during November and December is the most expensive of the year. As the Bank of England confirms that the average UK household spends around £2,500 per month on living costs, food, travel and entertainment, this can be at least £740 more during the month of December to cover the costs of gifts, holiday food and festive cheer. Finder.com confirms that the UK plans to spend £25.6 billion this year on gifts alone.
For a lot of UK families looking to cover the cost of Christmas, going to credit cards is the first port of call or, more recently, using buy now pay later. However, more than three million Britons will resort to high cost loans during the course of the year, with December the busy time for high cost lenders.
Whilst these types of loans can be fast and effective, the likes of payday loans can often charge more than 1,000 per cent APR, making them unaffordable for many to repay or meaning that a lot of individuals will overpay for a basic loan just to stay on top of their cash flow.
Industry experts agree. Lending Expert’s founder recently spoke on the subject, confirming that it is very easy to turn to high cost lending thanks to the ease of access to a loan, which can usually be funded in just a few hours.
Understandably, there is a desire to make this a good Christmas after last year. For some households, borrowing another £300 or £400 is not a big deal if it means creating memories with their loved ones, especially if they can pay it back in January or February.
However, it should be remembered that struggling to repay these types of loans can become even more expensive and can be the start of a vicious cycle of debt. It is essential that consumers are able to afford to repay what they borrow. Other options, such as a 0 per cent credit card, which don’t charge any interest could be a safer option for many.
David Green, Head of Brand at Fund Ourselves, says that “It is very easy to rack up debt when you are watching TV adverts or great products pop up on your social media which have probably been very targeted for you.”
“Plus, there is the buy now pay later trend where you can purchase something today and worry about the debt later on. So it is not surprising that people might be inspired to borrow money during the Christmas period.”
In addition, many employees are paid early in December and then as normal in January, leading to a six or seven week gap between pay dates. This can create a shortfall of cash.
The buy now, pay later phenomenon has grown significantly in recent years, growing to be a $100 billion industry.
Buy now, pay later is essentially a third party supplier that allows you to buy something upfront on finance and then pay for it later, whether it is a £40 champagne bottle or a £4,000 brand new kitchen. Sometimes it is interest-free or just a small amount of interest is added – and it can be repaid in monthly instalments or in one lump sum.
It is a very attractive proposition. After all, who wouldn’t prefer to buy something now and worry about payments later? But what is important and often overlooked is that an individual’s circumstances can change during the loan term. If they default, the interest rates can be in excess of 40 per cent APR. Buy now, pay later can certainly be useful to fund festive shopping, but if payments are missed, consumers can end up faced with a fortune of debt in 12 months time.
With the festive season potentially very lucrative for money lenders, is it something that they encourage during this time?
Under strict FCA regulation, loan providers are not allowed to advertise loans for Christmas purposes. High cost loans are designed to be used for genuine emergencies such as vehicle or household repairs – and not to pay for expensive shopping or luxury items.
For lenders, it is a potentially profitable time, with the volume of applications around December increasing by up to 100 per cent. But lenders must approach this with caution. Customers can be facing a lot of debt and using multiple loan products at the same time, leading to increased risk of default.